Crypto derivatives: Could they be the next wave of peer-to-peer lending?
November 10th, 2022

PWN is always looking for ways to expand the value proposition we provide to PWN users. We’ve done this by consciously allowing any ERC-20 token or NFT to be used as collateral on the PWN protocol, which means there are no whitelists.

Today, we want to cover another untapped opportunity which we believe you’ll find exciting: Using derivatives ⁠— specifically, LPs and tokens that represent claims on staked ETH — as collateral on PWN.

What are crypto derivatives?

According to a Reuters article from August 2022, the derivatives market now makes up 69% of total crypto volumes. Derivatives are financial contracts whose value is determined by an underlying asset. Some of these contracts can include:

  • LP positions like the ones on SushiSwap, UniSwap V3, or Pancakeswap

  • rETH, stETH or icETH, a derivative token that represents claims on staked ETH on Ethereum Proof-of-Stake

  • Futures and options, which are much more common and spoken about in the industry

Today, I’d like to tell you about a DeFi opportunity that we’ve often seen on PWN and get asked about a lot, especially by degens who do not want to sell their crypto in this bear market but need additional liquidity for various short- and long-term investment opportunities.

What’s this DeFi opportunity you’re talking about?

If you already know about PWN, you’ve seen that the lending protocol has no whitelists. Therefore, there are no restrictions as to what tokens can be used as collateral on the PWN protocol – any ERC-20, ERC-72,1 or ERC-1155 can be used as collateral both on Ethereum and Polygon.

The way we see it at PWN, there is no reason for LP positions to sit idle in cryptonatives’ wallets. LP positions specifically are valuable collateral. As collateral, they can be used to generate further liquidity and earnings for both the original depositor and lenders on the other side of the table.

Not being able to use LPs or stETH/rETH/icETH as collateral is capital inefficiency at its worst – do you agree?

Providing liquidity in DeFi is one of the most valuable services there is in the industry, and at PWN, the reason that we allow NFTs to be used as collateral in a loan in the first place was because there is immense value in them. This is not only because of their art; it’s also  due to what they represent: An agreement, a membership, a service – and everything has its own value.

Providing liquidity generates cash flow. Cash flow generating businesses can be leveraged. PWN wants to empower this growth for the entire DeFi ecosystem.

So how would this work?

As long as the token is not rebalancing, it is safe to use just as it is on PWN as collateral. Take the example of Rocket Pool’s rETH backed loan on PWN.  With 7.82rETH used as collateral, a borrower was able to borrow 7wETH at a 1.97% interest rate for a duration of 90 days. There are no liquidations;  it’s only in the case that the borrower is not able to repay the loan before expiration that the lender would be able to claim the 7.82rETH collateral.

Image credit: Rocket Pool
Image credit: Rocket Pool

More information can be found on Rocket Pool’s FAQ page.

How do you prevent someone from draining an NFT before accepting an offer?

Some LPs, such as the Uniswap V3 positions, are ‘mutable’ tokens, which means they can be modified at any time by the creator and someone would be able to drain the position on the LP before accepting an offer on PWN. PWN recently launched our Token Bundler tool, which solves this problem and brings a massive opportunity to DeFi. Now, we are working on a way to support mutable tokens natively so that users won’t be required to first bundle them.

If a borrower bundles their LP position, they will no longer be able to drain them before accepting an offer on PWN. Voila! Now, any mutable and immutable token can be used as collateral on PWN.

Rebalancing tokens, on the other hand, are a bit different and require a specialized wrapper to be used as collateral on PWN. For example, if you wanted to use Lido’s stETH token, you would first need to wrap it here.

Image credit: Lido
Image credit: Lido

We hope this brief but useful blog post has inspired some of you cryptonatives to think about out-of-the-box solutions to extract further liquidity from your assets during these difficult market conditions.

Let us know what you think, and if you have any comments, leave them on PWN’s Discord channel or Twitter and we will be more than happy to get back to you.

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