Summary
This is a proposal for adding the 3month Optim Bond Token as an isolated collateral type in the Liqwid v1 ADA market.
Project and Token Overview
https://app.optim.finance/dashboard
Optim Finance is the creator of Liquidity Bonds: an innovative financial primitive that enables users to rent ADA delegation rights to power novel use cases such as SPO loans and access leverage for ISPOs. Optim aims to facilitate the generation of yield and efficient allocation of capital in Cardano’s DeFi ecosystem.
Reasoning for 3-month Optim Bond Token as isolated collateral in the ADA market
Bond Tokens (BT) are tokens denominating a user’s fractional position of a bond loan. As Cardano Native Tokens, they can be used to interact with the wider DeFi ecosystem, such as marketplaces and lending protocols. At maturity Bond Tokens can be exchanged for the underlying ADA plus all accrued interest. Every Optim Bond Token is equal to 100 ADA plus the interest the bond issuer provides on the bond (active bonds can be closed if the SPO/bond issuer fails to meet the terms of the bond by not providing enough interest to stay above the 1 month [6 epochs] Interest Buffer minimum threshold). Active bonds with interest above the 1 month Interest Buffer can only be closed once they reach maturity.
The 3-month Bond Token is the shortest duration bond offered and helps de-risk the duration risk that exists before the bonds reach maturity.
As Bond Tokens are always redeemed at par value of 100 ADA (plus interest) they can be priced at the current market price of ADA * 100 (100 ADA = 1 BT). The 100% price correlation of Bond Tokens and ADA removes all price risk from the protocol when BT’s are used as isolated collateral in the ADA market. This greatly reduces the probability of liquidations for Bond Token backed ADA loans and is a low risk method to increase utilization in the ADA market.
This is a win for Liqwid ADA suppliers as increased utilization directly translates to increased ADA Supply APY and total yields as ADA borrows backed by 3 month Bond Tokens are repaid with interest to redeem the BT’s in Optim once they reach maturity.
Risk Considerations
By supporting 3 month Bond Tokens as isolated collateral for the ADA market the price risk is fully removed (1 BT = 100 ADA). Isolated collateral for correlated assets reduces the risk of price movements (e.g. a decrease in collateral asset value or increase in borrowed asset value) triggering liquidation events. This protects the Liqwid protocol and its users, specifically ADA market suppliers.
The remaining risks are interest rate risk and duration risk. The duration risk is mitigated to the largest extent possible by only enabling the shortest duration BT supported on Optim (3 months, 18 epochs). The interest rate risk means if the accrued interest on an ADA loan grows too much the borrower may go above their max borrow amount and risk a liquidation event.
By only enabling Bond Tokens as collateral for ADA loans the protocol ensures no Bond Tokens can be borrowed as users will lock Bond Tokens directly to the borrow script when they create a new ADA loan. This also guarantees Bond Token holders will receive back the exact same Bond Tokens they lock as collateral once they repay the loan.
Suggested Risk Parameters
*Important to note the effective liquidation bonus is even greater than 10% as the liquidator receiving the Bond Token can redeem it at maturity in Optim for the 100 ADA face value plus the interest provided on the bond by the bond issuer (e.g. a liquidator repays a 100 ADA loan for 90 ADA and receives 1 BT. At maturity the liquidator redeems the BT for 100 ADA [10% liquidation bonus realized] plus interest provided). As price risk is fully removed liquidators always lock in a 10% liquidation bonus irrespective of the time they redeem the bond. At maturity the liquidator will always receive an effective liquidation bonus of 10% + interest provided on the BT.
Specifications
Following this temperature check, the core team will complete the configuration for the oracle price feed, finalize frontend updates for the collateral distribution sections of borrow/repay/modify collateral modals and update the liquidation bot to support the 3 month Bond Token.
Conclusion
The core team recommends the adoption of this proposal and to add support for the 3 month Optim Bond Token as an isolated collateral in the ADA market. This proposal only supports Bond Tokens for use as collateral in the ADA market.
Do you support this proposal to add the 3 month Optim Bond Token as an isolated collateral in the ADA market?
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