The Problem With AMMs (And the solution)

People keep making things way too complicated. There is only one key problems that has to be addressed.

Problem: You cannot realistically borrow against your LP tokens. The AAVE AMM market is frozen (why?). The move towards the uniswap v3 model, with nft positions, is a mistake. There is no real reason why you should be able to borrow against your eth, and your usdc, but not your eth/usdc lp tokens. A LP is better collateral as its value is more stable. It also provides constant up to date information regarding price and depth of liquidity for liquidations. The sushi money market is a complete joke.

Solution: Take advantage of this opportunity to create an AAVE type money market (maybe a clone, maybe not) that works exclusively with a few select sushi LP tokens. This will make it more attractive to hold sushi LP tokens, as you don’t need to sell them to cash out. And since LPs represent two tokens, there could be benefits to borrowing one of the tokens of the LP as opposed to an unrelated one, as it is correlated. There could literally be a system to force liquidations through the pools themselves, creating the closest thing possible to a guarantee.

The people at MakerDao keep talking about real world assets, to the point where they hold a ton of wealth to back thsemselves up that could be sanctioned. If cheap credit is available for people holding an ETH lsd / decentralized stablecoin LP, they could just use their wealth stored in ETH as a pool of credit to invest in real world assets, thus decentralizing the real world assets problem. The pool is a lot less volatile than ETH, but still productive and correlated. The more money in these pools, the more stable the price, the safer using it as collateral for off-chain investments it is.

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This is all already there… with Kashi you could borrow against any token, including LP positions. I seem to remember providing an oracle for Sushi LP positions optimized for token-ETH pairs based on chainlink ETH price. It just has to be added to the UI to enable this I think.

Maybe not a crazy idea to have this as part of the add LP user interface? Could even consider creating a MIM style stable-coin that is backed by LP positions. This way you can also leverage your LP-position if you wanted to. Multiply the fees but have increased risk of liquidation and IL.


Hum… I haven’t looked very deeply into kashi as a quick glance gave me the impression the kashi market is broken. APR numbers are weird, very little capital. Can this be done through the front-end? If so… how?

This is important. Joining LPs to credit markets is key. This needs to be built to work, and heavily promoted.

What I’ve been able to figure out from looking at the documentation is that this is the plan, but hasn’t actually been implemented yet. I see no way to use the front-end to create an isolated credit market. The documentation talks about one day being able to use LP tokens, but “not yet”. This is very important.

For me minting USDs new Sushi stablecoin
using xSushi
or Sushi LP token would be great
(something like QiDAO)