cLend Risk/Reward strategies
WTwizard February 12, 2022, 2:06pm #1
the cLend product can be used very simply or with looping strategies that add leverage/risk. This is a topic to allow users to discuss ways to use cLend in conservative and aggressive ways. New users in the Core ecosystem may have the most questions so will gear the beginning posts more towards that group. The longtime coreVerse cult members most likely already have a strategy, but feel free to add more advanced ideas to this topic as well.
The goal is not to provide financial advice but to discuss the risk/rewards/outcomes of any particular strategy to help users make better choices around their particular needs
WTwizard February 12, 2022, 3:49pm #2
Newer user ELI5 post:
cLend Risk/Reward concepts
There are a few basic concepts that make cLend different than the typical Lend/Borrow defi products that most users are familiar with such as Compund, Aave, and Cream. The examples will all be based on depositing an asset and borrowing DAI stablecoin back out since that is the only scenario offered with cLend.
Taking a loan at Aave for example, you would deposit ETH and borrow DAI against the ETH value. Generally you can borrow up to 75% of your collateral market value. So if 1ETH is $3000usd then you can take $2250usd out in DAI. In this scenario there are two risk factors to losing your collateral:
- User is unable to return the DAI borrowed + interest due (within user control)
- The collateral deposited drops in market value below the 75% threshold. (outside of user control)
cLend inherently has the same risk #1 regarding mis-management of borrowed funds and the resulting inability to repay funds due to release your deposited collateral. In more plain language, if you gamble away your borrowed funds on super risky shitcoins/futures, then you risk losing your collateral:)
The cLend unique feature is that risk #2 is completely removed from the equation. The basic concept to understand is that the deposited collateral, coreDAO or core, have a floor/base value that is fixed in DAI stablecoin. This is the reason that all loans, so far, are given in DAI & the reason that you can borrow 100% of collateral value instead of only 75% typical with other platforms. The user is borrowing the underlying DAI that supports each token. This eliminates the most uncertain risk of market forces suddenly liquidating the user. This may seem like it eliminates 50% of the risks of borrowing, since there are two main ones, but it is much more than that. The only risks you have with cLend are mis-management of borrowed funds. Your success/failure with cLend is completely within your control.
This feature opens up more ways to use the product which will be discussed in ongoing posts. As always, if you are new to defi lending or coreVerse ecosystem, you might want to wait on cLend use until you have a better understanding of how things work and the risks involved. You can use the entire coreVerse ecosytem, very profitably, without taking any loans at all.
WTwizard February 13, 2022, 5:32am #3
Newer user ELI5 Post:
cLend Base Loan Rates and ‘Floor Price’ description.
Floor price/support is a feature of coreDAO and Core token.
Price Floor is exactly what it sounds like: the redeemable/loan value of coreDAO and Core are fixed. You will always be able to borrow at:
1coreDAO = 1DAI
1core = 5500DAI
The floor is not influenced/altered by the free market price that either token is trading. Whether you buy coreDAO for $5usd or $0.50usd, you can borrow 1DAI per token. This sets up novel game theories/arbitrage which will be discussed later in this ongoing thread.
-for discussions sake, and to head off the obvious question, I will mention that this floor value could be raised by the DAO in the future if treasury grew to accommodate a higher fully DAI backed floor price. Since DAO is not even active yet, it’s a moot point to discuss now-
When you take a loan you are essentially borrowing from yourself. The DAI you receive are pre-allocated reserve funds from the treasury attributed to your tokens. Loans are not provided by a ‘counter-party’ on the other side. The ‘counter-party’ scenario is what the typical Aave-esque platform uses. The inherent risks in that type of system are obvious as you are relying on an unknown 3rd party to provide borrowing funds. Plus the incentive costs to keep them interested in lending are much higher then a fully funded treasury.
The DAI backing your tokens will be available from the treasury anytime you deposit coreDAO or Core collateral into cLend similar to an IRL line of credit. This is a novel feature of core and a very stable approach to treasury management.
0xzert February 13, 2022, 2:10pm #4
I love the simplification on what core is trying to do. I have a couple of comments:
I think we should come up or borrow from tradfi because the floor concept has been widely used in NFT representing the bottom price of a collection that can decrease or increase depending on the demand and supply (e.g., the floor of one cryptopunk has fluctuated from 10 eth to 100 eth in a year). So, someone that is not familiar with coreverse is more likely to have the associated idea of floor from the NFT space.
Risk-free borrowable of 5500 DAI per Core
One Core is 5500 DAI redeemable at any time
One Core may be reissued for 5500
The floor of one Core is 5500 DAI
If you think of others, we can later create a new poll.
- Value proposition table for all products (core loans in this case)
The second issue is display what you beautifully described WTwizard in a table with footnotes. I’m personally a fan of simple value proposition tables that are easy to read. I have tried to create one line with the value proposition for core loans based on WTwizard’s described risks:
We could then have footnotes or pop-up windows with more detail information.
WTwizard February 14, 2022, 3:35pm #5
Newer user ELI5 Post:
cLend unconventional risk and strategy to avoid liquidation
One particular aspect of cLend that is not the norm, that users may be used to in typical borrow/lend protocols, is regarding the ‘repay’ function on cLend loans. We’ll use Sushi borrow/lend as an example protocol, it’s not an endorsement, just a familiar reference point for most users.
Typical borrow scenario on Sushi:
A user deposits Sushi as collateral and is allowed to borrow up to 75% of collateral value in DAI. The user can access either the sushi collateral or the DAI borrow funds in partial amounts as long as the ratio remains below the 75% collateralized value. This ability to remove collateral at will IS NOT available with the cLend product.
Users can only remove collateral when the entire balance of DAI+interest is paid off. Any added market value of collateral is not accessible until DAI is fully repaid. Here are two examples to show where this becomes an issue:
Typical Sushi scenario:
$1000usd Sushi collateral/ $750usd DAI borrowed (75% LTV ratio)
Sushi value doubles. New Loan stats:
$2000usd Sushi collateral/$750usd DAI borrowed (37% LTV)
Loan can be paid directly from increased collateral value by removing $750usd worth of Sushi, converting to DAI, and repaying borrowed funds. That would not go outside of 75% LTV during the swap. This is a typical scenario most users are familiar with.
Here is how the same scenario plays out with cLend and the simple rule to follow to avoid ‘loaning yourself into a corner”
Typical cLend scenario:
$1000usd coreDAO collateral/ $1000usd DAI borrowed (100% LTV ratio)
coreDAO value doubles. New Loan stats as cLend sees them:
$1000usd coreDAO collateral/$1000usd DAI borrowed (100% LTV)
Where did the market value increase go? The market value of $2000usd is an extrinsic value until you release it from the loan. cLend values collateral in units not market value. cLend sees 1000coreDAO units and has no correlation to current market value. You cannot access the increased collateral value to pay off your loan. Users need to pay the 1000DAI back from outside the collateral.
This sets up the unique scenario where increased collateral value could grow to 5X more than repay amount, and the loan would still be liquidated if the DAI is not directly repaid. All this seems daunting but there is a simple rule to keep in mind that should minimize this risk.
Rule of Thumb for safe cLend loans: Only take one loan per wallet or per asset.
Do not ‘loop’ loans just because you can. This keeps a safe margin of error and avoids users being responsible for paying two loans from one borrow pool.
Full Disclosure: This post was written after I realized this concept and had broken this rule. I now have to figure out a solution. Learn from my smooth brain mistakes:)