Sweep allocates to on-chain DeFi strategies, and to securities through secured margin lending.
Sweep is designed to meet the demand for safe and redeemable dollar savings. Sweep can fund assets that
- Can give money back within one week
- Have a low risk of loss, in the range of an AA rating. Liquid investments can be converted to low risk loans when borrowers provide enough capital to cover the value at risk. Money market securities meet this requirement with small amounts of capital.
Allocations are controlled by:
- The lending limits placed on each stabilizer by protocol governance
- Repayment requests, which have the effect of reducing these lending limits to accommodate a demand from savers to sell SWEEP.
- The appetite of borrowers. This is affected by the current interest rate, and the borrower perception of the yield on their mandated investment. The protocol acts to find a rate that savers will buy, and borrowers will accept. If savers are demanding a higher rate than borrowers can earn, borrowers can redeem their investments and shrink the supply of SWEEP.
Sweep lending agreements include a mandate to buy specific securities, or specific types of securities. The process of matching a dynamically traded portfolio with an investment mandate can be complicated. Sweep can outsource this complexity by buying ETFs and funds from a money manager that has this capability.
- Liquidity. Sweep attempts to provide on-demand liquidity for SWEEP holders with minimal discounts for sellers. This is a complicated task for a bank that makes long-duration loans. It is much easier if we allocate to liquid securities that can be sold in less than one week.
- Reliability. Securities custody is much more reliable than crypto custody. We are not aware of any cases where a securities custodian has lost a significant allocation of securities. Securities custodians are not exposed to technical risk at the L1 level or the smart contract level. Securities custodians can deliver value to lenders even after disruptions to on-chain software.
- Returns. In many market conditions, liquid off-chain securities will deliver better risk-adjusted returns than on-chain investments. In December 2022, US treasuries are paying significantly more than low-risk on-chain dollar pools. We observe that in 2022, after adjusting for risk and liquidity, high yield securities offer a better deal than many on-chain higher yield pools.
- Capacity. Off-chain markets are bigger than crypto markets and have the capacity to absorb far more savings without suppressing yield.
Sweep uses a secured margin lending structure in order to advance these goals:
- A clear separation between the decentralized DAO, and the CeFi securities investors
- DAO simplification. A DAO that relies on community governance, and is mostly automated software, needs simple responsibilities and decision making. This structure pushes responsibilities to off-chain borrowers. It uses decentralization.
- Harness the compliance, accounts, capital, and expertise of wholesale borrowers.
Sweep may make allocations to DeFi. DeFi strategies can stabilize SWEEP pricing with rapid purchases and sales. DeFi may also pay higher risk adjusted interest rates in some market conditions.
Sweep DeFi strategies will be delta neutral and protected by appropriate amounts of borrower capital. We will only approve allocations that can be liquidated with low slippage in less than five days. The allocation decisions will be controlled and monitored by human borrowers with capital at risk.