Professional wholesale borrowers can get leverage from a savings protocol.
- Borrowers use senior tranche loans to multiply their return on equity.
- Savings protocols partner with selected professionals in to get design, off-chain infrastructure, operating attention, high levels of transparency and reporting, and capital.
Borrowers can use Maxos tools to assemble proposals and seek funding.
Sweep has a small number of slots for money market placement. Participants should be comfortable operating both DeFi and fixed income investments.
In the simplest money market placement, a borrower might add 2% capital, and expect a 50 bip spread between the SWEEP funding rate and returns on a mandated portfolio. This would produce a 25% return on equity. The mandated strategy that meets the needs of Sweep savers is low risk and short duration.
The primary responsibilities for Sweep money market placement are:
- Handle investments and redemptions reliably and efficiently
- Monitor spreads and costs. Decide when to add to positions (when return on equity is competitive) and when to close out positions. This keeps the supply and demand of savings in balance, and removes risk for the borrower.
Sweep borrowers can manage their position with a weekly cycle. Auctions, repayment demands, and interest rate changes happen once per week.
Borrowers can propose higher volatility strategies if they add enough capital and shorten redemption periods to manage the extra risk. Those adjustments can be programmed into the margin loan.
Borrowers can build programmed DeFi strategies, and attach them to a Stabilizer to get leverage. This gives them an effect similar to lending protocols such as Gearbox, but with customized terms that match their customized strategy.
DeFi strategies fit into Sweep and many other savings protocols because they can invest and redeem in 24/7 markets. This makes it easier to keep cash invested in earning assets.
Savings protocols can bring funds from other blockchains.
Sweep can provide leverage and demand for private tokenized securities. This class of securities has been unpopular with human buyers since it was first tried in 2018. Humans prefer the easy and reliable custody systems of CSRs, fund admin and cap table software, and even spreadsheets. On the other hand, DeFi scripts require a token format and represent a new source of demand.
Security tokens differ from normal DeFi tokens. Regulators usually require that a security token can only be purchased by a qualified buyer that is in a registry. This makes them harder to sell. It also breaks composability because DeFi scripts are usually not in the list of qualified buyers, and they can't add value with automation.
Tokenized security issuers can partner with protocols such as Sweep to add value with automated and composable leverage, trading, and structuring.
Borrowers can use the Stabilizer toolkit to design a marketable senior tranche for longer duration or higher yield investments.
This will require a savings protocol that can tolerate redemption delays or higher risks of default. Or, it will require a banking model that includes liquid assets, and can support an allocation to longer duration investments. Our community looks forward to working with financial engineers and borrowers to design those new models.
Borrowers can design a Stabilizer package that fits the risk and liquidity requirements of a specific savings protocol, and request funding. Borrowers can use an existing package, or develop their own.
- A DeFi package will include a pre-programmed strategy that holds assets, invests, and divests. [Links to documentation and examples for iAsset].
- A collateralized off-chain loan package will include a loan agreement, collateral pledge, collateral agent, wallet workflow, and some thought around both repayment terms, and packaging a defaulted agreement for sale to a liquidator.
- A margin loan for securities will include a loan agreement, collateral agent, segregated accounts, wallet workflow, and a mandate describing the authorized securities purchases. Most of this is available off the shelf.
After the borrower has assembled the package, they can build a Stabilizer. Maxos provides a factory for deploying a Stabilizer with standard code.
The borrower proposes some terms by calling propose() in the Stabilizer. Some of the terms include:
- Required capital ratio. Capital prevents defaults and needs to be higher for assets with higher volatility or longer liquidation times
- Spread. The Stabilizer can charge a spread over the base funding rate to compensate for risk and work in covering liquidity delays.
The borrower then submits the Stabilizer and package for funding.
The borrower moves control of the Stabilizer to the savings protocol with the propose() function.
The borrower posts a forum proposal that describes the deal and terms. [Write instructions for forum proposal]. Protocol governance is then responsible for negotiating and setting the final terms.
The borrower operates the Stabilizer.
- 1.Add junior tranche capital
- 2.Borrow. This mints SWEEP or the funding currency into the senior tranche
- 3.Currency conversions. Sweep stabilizers provide functions for converting between SWEEP and USDC. This gives the borrower control over AML qualification of the USDC funds, and over the trading terms and costs.
- 4.Invest. This will send funds to a wallet or strategy
- 5.Redeem. This will redeem from an on-chain asset
- 6.Return assets. An asset that does not have redemption code requires the borrower to return the funding asset to the Stabilizer address. A SWEEP borrower returns SWEEP, or returns USDC and uses utility functions to trade it for SWEEP.
- 7.Repay the funding asset
- 8.Respond to signals. For example, the protocol may request repayment from a securities loan.
A borrower can close the Stabilizer after repaying all loans and extracting all remaining assets.