KittenSwap (6) : Towards Lending+Option Pools for all ERC20 Tokens

1. The Basic Design

  • Lock 100 TOKEN to borrow 100 * 0.03 ETH = 3 ETH for 1 month, and the borrower will be paying 60% apy interest (so, 5% for 1 month).
  • There won’t be any liquidation during the 1 month period. This is because the prices of low-liquidity tokens can be easily manipulated. For example, a whale can dump TOKEN to force the liquidation of all borrowers and then buy back TOKEN at a cheaper price.
  • After 1 month, the borrower can either payback 3 * (1 + 60% / 12) = 3.15 ETH to unlock 100 TOKEN, or default.
  • If the borrower defaults, or forgets to payback the loan, then the lending pool gets the 100 TOKEN.
  • The lending pool has 100 TOKEN. It’s unwise to directly sell them for ETH in one trade.
  • Instead, the pool will create a limit order to sell 100 TOKEN, so that traders can directly buy them from the pool.
  • If you are a lender, you can also withdraw these TOKEN (according to your share of the pool), because they are a part of the pool at this moment.

2. The Risks and Rewards of Borrowers and Lenders

The best part is, we have a win-win scenario here.

  • You are only paying a 5% premium to get some free capital for 1 month. And there is zero risk of liquidation.
  • If TOKEN drops below 0.03 ETH, you can default, and walk away with more ETH.
  • You get a nice 60% apy paid directly in ETH if the borrower paybacks the loan, which will happen with high probability, because 0.03 ETH is much lower than 0.1 ETH.
  • There is the risk of borrower default. However, if you always want to have some TOKEN in your portfolio, but only if it’s cheap enough (such as 0.03 ETH), then this is a great way to do so.

3. Determining the Parameters

Consider the price-1-month and apy-1-month parameter in the example.

  • Pump the uniswap price of TOKEN to 100x using flash loan.
  • Borrow all ETH from the pool using a small amt of TOKEN, as now it appears the TOKEN is highly valuable.
  • Payback the flash loan. The uniswap price of TOKEN falls back, and all lenders are rekt.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store