MakerDAO’s PSM in the spotlight, Genesis bankruptcy filing reveals web of leverage, SEC puts Eisenberg in jail and qualifies $MNGO as a security, Q&A with Myso Finance,...
Issue #25 of The State of DeFi Lending newsletter
Welcome to issue #25 of The State of DeFi Lending, a newsletter covering the highlights of lending markets in DeFi.
In this issue we cover
MakerDAO continues to be in the spotlight for its exposure to GUSD, a potentially profitable partnership with Paxos for USDP as well as a community vote to deploy $100m into Yearn Vaults. All of these topics touch MakerDAO’s PSM which remains a source of liquidity and yield.
Genesis sits at the center of a highly complex network of IOUs that’s beginning to unravel. In the process, GBTC’s share price had been seriously impacted by the leverage structure as Genesis liquidated shares it held as collateral from DCG. The connections are as convoluted as it gets and highlights why DeFi is the way to go.
The SEC formally charges Avi Eisenberg with market manipulation of Mango’s governance token $MNGO which the SEC declares a security.
Interview with Myso Finance’s Dominic.
Read below for more…
News
MakerDAO Peg Stability Mechanism (PSM) remains a central point in DeFi headlines. This time it is a combination of worries over GUSD and excitement over Paxos’ revenue share proposal as well as Yearn Vaults.
GUSD worries
Last week, MakerDAO made headlines regarding GUSD as questions arise about Gemini’s future: Gemini’s subsidiary Earn has granted loans worth $900m to Genesis which filed for bankruptcy. Gemini is also the issuer of the GUSD stablecoin to which the MakerDAO PSM has a $500m exposure. On 19 January, MakerDAO tokenholders were polled whether to keep this arrangement or to reduce the GUSD PSM debt ceiling to nil. The vote finished narrowly in favor of keeping the status quo (50.85% of all votes). The reduction of the debt ceiling would have tested Gemini’s fiat liquidity and might have forced a bank-run with unknown consequences. Earlier last week Tyler Winklevoss had posted a lengthy post in the MakerDAO forum, along with subsequent Q&A in their Discord, in an attempt to avoid GUSD FUD.
Other protocols with GUSD exposure likewise look for certainty: Gearbox and RiskDAO looked at the GUSD risk to the platform which did not reveal any immediate concerns.
Paxos proposal to add USDP
Paxos is trying to promote its USDP stablecoin by increasing the MakerDAO PSM debt ceiling to $1.5bn from the current $0.5bn. Paxos is offering to share 45% of the Federal Funds Rate (currently at 4.3%) with MakerDAO which could add up to a total of $29m in extra revenue.
Deploy USDC into Yearn Vault
MakerDAO has voted to deploy USDC 100m into Yearn vaults which will earn an additional 2% pa. The source of this investment would be the PSM. It’s important to point out that this will access DeFi-native yield to Maker, instead of US treasury yields from GUSD and USDP.
DCG’s subsidiary Genesis files for bankruptcy and reveals a highly complex web of leverage.
The filing reveals that Genesis took GBTC as Collateral and liquidated the shares. This explains the constant selling pressure and historical NAV-discounts of 50%.
This chart reveals how convoluted CeFi lending structure are, how difficult it is to untangle them and the ripple effect they cause within the system.
The SEC has formally charged Avi Eisenberg with market manipulation of a security. He is now awaiting transfer to a federal prison in New York.
What makes this announcement noteworthy is this statement by the SEC:
“...manipulating the MNGO token, a so-called governance token offered and sold as a security on the crypto platform Mango Markets”
In addition, the SEC states:
“.. that despite MNGO’s labeling as a “governance token,” it “was purchased and sold as a crypto asset security.” Its holders had expectations of profit and “entered into a common enterprise” – two of the factors the SEC looks for in identifying investment contracts that fall under securities laws. And holders of MNGO can use their tokens to vote in decisions governing Mango Markets’ operations, the agency said.”
The qualification of $MNGO as a security could have severe implications for other governance tokens as the SEC is trying to step up its game against crypto.
Announcements & short news
MetaStreet and Arcade offer perpetual loans for Pudgy Penguins
Radiant introduces v2 to as an improvement to their existing cross-chain lending
Q&A with Myso Finance
MYSO Finance is a novel lending protocol which is pioneering the concept of liquidation-free, fixed-interest and oracle-free borrowing. Borrowers pledge collateral which can be reclaimed by repaying principal & interest during a fixed loan term (currently at 90 and 180 days). Collateral will not be liquidated should the max LTV be exceeded during the term of the loan.
MYSO is built with option-logic in mind: Lending on MYSO is akin to writing a covered call option on the collateral asset. The repayment amount denotes the option strike price under which lenders incur losses, should the borrower not repay the loan.
MYSO works on the basis of two-token liquidity pools (LPs) which are seeded by LPs and to which the borrower needs to contribute the collateral asset in order to borrow. MYSO v1 was launched on 10 Jan. to the public on the Ethereum mainnet.
Name: Dominic
Position: Chief Operating Officer
Question
MYSO Finance was born during the ETHOnline Hackathon 2021 (and was one of the winners!!). How did the idea for MYSO come together and how did the team meet?
Today's DeFi borrowing and lending protocols all take a liquidation-centered design approach, meaning that they trigger liquidations as soon as a target LTV is breached. This design approach comes with several drawbacks:
Periods of market turmoil intrinsically bring about mass liquidations, which result in millions of $ worth of liquidation penalty fees. In turn, this creates financial contagion risk, as cascading liquidations and increasing sell pressure pose a systemic risk to the overall crypto market.
Liquidation related incentives are typically skewed towards liquidators causing so called “over-liquidations”. Moreover, they create MEV with well-known negative externalities
Operational overhead is extensive when utilizing available DeFi protocols — borrowers need to constantly monitor health/LTV ratios and adjust positions.
Oracles and precise price feeds are necessary to accurately price assets and trigger liquidations — today’s borrowing protocols are thus susceptible to oracle exploits and flash crash risk. This places a great deal of trust and reliance on proper oracle functionality and makes markets only available for assets (and blockchains) which have reliable oracle oversight.
In order to address the limitations present in existing lending protocols, Aetienne Sardon, the founder of MYSO, developed the concept of Zero-Liquidation Loans during the ETHOnline Hackathon in 2021 and officially incorporated MYSO in 2022. Having already worked together with Aetienne at Swisscom in the Digital Assets team, I then decided to join the MYSO founding team, alongside Jamie, our CTO, who Aetienne met during the ETHOnline hackathon. We then assembled a team with the shared objective of creating a decentralized lending platform that breaks through the constraints of current protocols and were united by their passion for delving into the possibilities of DeFi and their aspiration to uncover the "Million Yield Structuring Opportunities" (MYSO) that it presents.
MYSO launched a few days ago and the initial pools are for Liquid Staking Protocol & Derivative tokens $RPL and $rETH. Why did you pick these tokens for your launch?
These initial assets were mainly chosen due to our appreciation and belief in the core values for which Rocket Pool and their community stand for: decentralization and trust-minimization (i.e. Rocket Pool is the most decentralized Ethereum liquid staking protocol with approx 2k live node operators). This strongly resonates with the core values of MYSO and our aim is to be an enabler for communities like these by providing useful DeFi building blocks to them.
We hereby take a unique approach by enabling lean borrowing and lending facilities for fast growing communities, also in case they don't yet have any established oracles. This allows us to promote and uphold symbiotic relationships with protocols that are as focused on the true crypto ethos as Rocket Pool!
Can you please elaborate on the interest rate model of MYSO?
When launching a pool on MYSO, there are a number of parameters that a pool creator can set, one of which defines the pool’s interest rate model.
The interest rate model for every MYSO pool contains two rates and liquidity bounds (r1, r2) and (L1, L2) that define both the upper and lower bounds of applicable interest rates and pool liquidity. This allows the applicable pool APR to decrease the more liquidity is added by LPs and increase the more liquidity is used i.e., level of pool utilization.
It's important to note that rates can never fall below r2, providing LPs with a guaranteed lower bound at which their capital is lent to borrowers.
MYSO is currently in a guarded launch. When do you expect to fully open to the public and what will be additional token pairs?
At present, MYSO is undergoing early market validation, during which we are consistently evaluating new pools and offerings to provide the best user experience. One such example is the upcoming launch of a wETH/USDC pool. Despite the ongoing testing and validation efforts, a specific date for the availability of liquidity provisioning has not been determined yet. However, we are striving to open up LPing to all users in the near future.
Governance is a huge discussion point for lending protocols. How is MYSO approaching this topic? Do you see best practises at other protocols?
Community involvement is a core principle of DeFi as it ensures that the protocol aligns with the needs and interests of its users. MYSO recognizes the importance of community engagement and has actively involved the community in different feedback iterations for our private and public testnet. We are committed to continuously seeking out and incorporating the perspectives of our community members to improve our protocol.
In addition, we are closely monitoring best practices at other DeFi protocols, and we are learning from the experiences of existing protocols in order to make informed decisions about our own governance structure. Some of the protocols that we are following closely include Curve, Aave, and Rocket Pool. These protocols have established successful models for community involvement and on-chain governance, which we believe can be adapted to the specific needs of MYSO.
The protocol is permissionless and allows anyone to set up lending pools. When do you think this feature will go live?
MYSO is positioning itself to offer the creation and management of permissionless pools alongside some native pools. This will enable more robust liquidity to long-tail assets and allow for DAOs and individual protocols to have a zero-liquidation alternative for their users to gain access to borrow liquidity. Having said that, there is currently no set date for the launch of permissionless pools on MYSO but we will keep the community informed on any updates and progress in that regard.
Can you tell us why you picked Ethereum mainnet for launching where lending markets are not scarce and are there any plans to go multi-chain? And if so, what would be your main criteria to pick the chains to grow into?
We’ve choose Ethereum because we believe in its potential and its continued importance in the DeFi space. Ethereum also leads all chains in DeFi TVL and many projects that MYSO intends to support, like Rocket Pool, are currently live on Ethereum mainnet.
In terms of criteria for additional expansion, MYSO is focusing on supporting chains that have thriving DeFi primitives and opportunities for growth. Our contracts are EVM-compatible, which allows us to explore all possible options. As we are still in the market validation phase of our growth timeline, we are constantly on the lookout for opportunities for expansion. In line with this, we recently launched MYSO on Arbitrum testnet and will soon launch our first pools on Arbitrum mainnet!