Lending protocol

Hello again :hugs:

Since my previous proposal had a nice amount of success, I would like to discuss the second main use case that I see for MILK: serving as a collateral for borrowing ADA.

Let us consider the following scenario: you have a certain amount of MILK (let’s say 1,000 tokens), which correspond to a certain amount of ADA (let’s say 2,000 ADA for sake of simplicity). Your MILK tokens are happily staked and you’re earning some fancy token through them, or maybe even ADA itself (if my previous idea has already been implemented), when some juicy NFT is launched, and you need 100 ADA for minting it. Right now the only way of doing it is swapping 50 MILK for 100 ADA, which in the aforementioned scenario bears a hidden cost: by selling 5% of your MILK token, you are actually giving up 5% of your passive income stream for as long as you cannot afford to buy back those 50 tokens back.

So what if there was a better way? Actually, there is: MILK could be used as a collateral for borrowing ADA. In this scenario, you could keep your MILK token staked, thus continuing to earn your rewards, and lock a fraction of them in order to borrow the ADA you need.

Having explained the rationale behind my idea, I will also detail the elements that I believe would constitute an optimal implementation. Again, feel free to offer any kind of constructive criticism about them :tada:

First of all, the lend should be overcollateralized. You should not be able to borrow an amount of ADA larger than 25-50% of the value of your MILK tokens in order to reduce the risk of liquidation. Since liquidating large quantities of token lead to a higher slippage, the threshold could actually be a function of the collateral (like, 50% for 100 ADA or less down to 25% for 10,000 ADA or more). This would also favor the small holders, which is, in my opinion, a good idea.

Secondly, if my previous idea has been implemented (thus, MILK will be used to farm ADA alongside with exotic tokens), those ADA could directly flow to repay the loan, and only once it is repaid, they would resume accumulating in your wallet. This way, you wouldn’t even need to do anything: your tokens would repay your loan for you.

Third point, this would generate another stream of income for MILK holders, because lending ADA wouldn’t be free. There should be an interest, of course, which should be another “dividend” paid to MILK holders.

Fourth (only in case the devs wish to incentivize MuesliSwap users go full degen mode), if you borrow ADA against MILK, while at the same time you are providing liquidity to some pool of the DEX, also the yield from the pool could be used to repay your debt. In this scenario, in order to fully integrate MILK pools with liquidity pools, the various tokens that you earn by staking MILK, instead of being accumulated in your wallet, could be directly sent to the corresponding liquidity pool (with an automatic conversion of 50% into ADA) for adding yield to yield.

Therefore, if all my ideas were implemented, by staking MILK:

  1. you would earn some exotic token;
  2. those tokens would be sent to liquidity pools, thus generating a second yield;
  3. you would also earn ADA (third yield);
  4. you could borrow more ADA by locking your MILK;
  5. you could stake those ADA or send them to liquidity pools as well, thus generating a fourth yield stream;
  6. finally, it would be nice if the tokens locked in the liquidity pools were also staked (I am thinking, for instance, to VyFi that grants you an 18% APY), and those rewards were provided either to liquuidity providers of the AMM or to MILK holders so that regardless of your pool you would be getting a range of different tokens. In both cases, you would have a fifth yield stream.

In conclusion, I think this would be an amazing idea. Hopefully, very lucrative both for the borrowers and for the lenders :money_mouth_face:

What do you think about it? I would love to know it :blush:

4 Likes

I like the evolution of your proposal now I know that Muesli is a Dex / Aggregator It could leverage protocols that are already utilizing a similar method by being a plugin of sorts. Ie. MELD lending protocol, AADA, and Liqwid all do lending borrowing and staking … MELD has Multichain in the works w/ MALADAEX . Muesli could leverage the aggregator portion of the code and find the best loan rate thru all the different lending/borrowing protocols and offer the MILK as a collateral in conjunction w/ MELD token, LQ, and AADA. Maybe… :thinking:

3 Likes

Thank you very much! Yes, you synthesized very well my idea :grinning:

Wow this is one of the most beautiful ideas I have ever heard. The idea can greatly contribute to the growth of the project :milk_glass::rocket:

1 Like

When voting? :smiley:

100k+ MILK coming from here for this proposal.

Good iterative approach with throwing ideas and now we are with something decent already. Good job!

2 Likes

Thank you for your kind words, guys! I guess voting will come after the launch of HungryCows is completed :cow:

I will share with you my forbidden dream:

By keeping MILK in a staking pool you can earn ADA alongside with a token (let us call it token XYZ), and use it as a collateral to borrow ADA from the treasury.
By earning you ADA, MILK price has a low volatility, because if its APY is higher than ADA, people will sell ADA to buy MILK, thus increasing its price and lowering its APY; conversely, if its APY is lower, people will sell MILK to buy ADA, thus increasing its APY. In order to explain it with numbers, if you earn, e.g., 0.1 ADA / MILK / month, each MILK should earn you 1.2 ADA per year (= 0.1 ADA / month * 12 months); under the assumption that ADA staking offers an APY of ~5%, in order to get 1.2 ADA / year you should stake ~24 ADA, which would correspond to MILK’s fair price.
In a long-term perspective, ADA staking rewards won’t be ~5% forever; when they will go lower, MILK price will increase accordingly, therefore MILK will serve as a contingency against ADA diminishing returns… a store of value, or of yields.
Getting back on track, you are keeping your MILK staked on a staking pool, and this earns you both ADA and XYZ.
Once every 24 hours, the rewards that you have accumulated are automatically sent to the ADA - XYZ liquidity pool of MuesliSwap AMM DEX.
Your ADA in the liquidity pool are automatically staked, so you earn an interest on them.
XYZ tokens in the liquidity pool are automatically staked too, so you earn an interest on your XYZ tokens as well.
Oscillating around its fair price, MILK has low volatility with respect to ADA, therefore using it as a collateral for ADA is a safe bet because it comes with a low risk of liquidation.
Given the low volatility of the ADA - MILK pair, you choose to lock part of your funds in order to borrow some ADA.
You send your ADA to MuesliSwap Milkomeda AMM, and you swap them for stablecoins (let us say DJED and USDC).
You provide liquidity to the DJED - USDC liquidity pool.
Your yield is automatically compounded by MuesliSwap AMM, until you decide to withdraw some funds for buying more MILK :milk_glass: and power up your engine from the bottom.
Therefore, in this scenario you’re simultaneously earning:

  1. ADA,
  2. XYZ,
  3. DJED, and
  4. USDC.

Moreover, you are simultaneously using:

  1. MILK staking pools,
  2. ADA staking,
  3. XYZ staking,
  4. MuesliSwap lending protocol,
  5. MuesliSwap Cardano AMM DEX,
  6. MuesliSwap Milkomeda AMM DEX,

and, by using all of this, you are paying commissions to MuesliSwap, which contribute to generating a constant stream of ADA, which stabilizes the takings of the DEX, which in turn stabilize the ROI generated by MILK, which stabilizes its price with respect to ADA, which allows you to lend more MILK safely to the protocol for borrowing ADA, in a self-empowering circle.

I hope I made you feel just as excited as I am at this perspective :hugs: because, come on, what else could you possibly desire? :wink:

Personally, I have a few more ideas to frame in this scenario, but for now let’s just add a few HungryCows to boost your yields :wink:. Both those of the AMMs, and that of MILK staking pools, because could you imagine a cow :cow2: that cannot boost your MILK :milk_glass:? :stuck_out_tongue_winking_eye:

Happy yield farm… milking. Happy yield milking :milk_glass: :partying_face: :milk_glass:

1 Like

Thank you for both of your proposals Plan_A! We have reviewed them internally and they are very interesting. We appreciate the time you put into them! Once voting is live on the forum i can imagine that they will be amongst the most popular ones.

3 Likes

Thank you, Vanja, for your valuable feedback. I really believe in the value of MuesliSwap Team, so I’m grateful of the consideration that you are giving me :blush:

I have more ideas in my head… some more mature than others. If I can give them a coherent formulation, I will post them here, for public review.

I’m not sure of the procedure for the public voting, so if you wish to discuss some detail or anything, you’re welcome to privately reach out for me, either here or on Twitter (@TheRealPlanADA). I’ll be more than glad to support you at the best of my capabilities.

Cheers :hugs:

1 Like

Absolutely love the initiative here, the ideas you have put forth are truly ingenious! Honestly I will need a tutorial on how to implement this strategy (or maybe the brilliant minds at Muesli will do this for me;-) but the ideas are very well thought out. Thank you for putting your time and effort into this.

2 Likes

Thank you for your kind words :blush:

Yes, in my mind the flow is automatic, so you wouldn’t need to do anything: the smart contract would do it for you :smile:

And, by the way, this is just one of many possible strategies. I’m fairly sure that, as soon as we start to see the idea implemented, many people will go fully degen and propose many other strategies :blush:

1 Like