Inside Securd, the Decentralized Crypto Savings Account financing liquidity
Most crypto holders just sit on their holdings waiting for price increase while they could potentially receive additional passive income. However, the majority of DeFi protocols proposing yield (or APY) come with risks and complexity that may not suit the average investor profile. This is where Securd comes into play but let’s first clarify a few concepts.
1) What is DeFi
DeFi stands for “decentralized finance” and refers to the ecosystem of financial services where centralized entities, such as banks or insurance companies, have been replaced by algorithms executed on a Blockchain (smart contracts).
The key specificities of DeFi, as opposed to centralized finance, are:
- openness: everyone can participate without any censorship or control of funds
- trustless-ness: protocols are built in a way such that participants can interact with each other without the need for trust or law enforcement
- transparency: every participant has access to the full documentation and code of the protocol
- composability: protocols can interact between each other to build more complex financial services
Since 2020, the DeFi industry has boomed with two main use cases:
- Decentralized Exchanges (or DEX), where participants can trade tokens without going through a centralized entity such as Coinbase or FTX
- Lending Protocols, where tokens can be borrowed in a trustless manner using on-chain collateral and automated liquidation mechanisms
In this article, we will have a closer look into a protocol, called Securd, that illustrates the composability of these 2 use cases.
2) How do Decentralized Exchanges work?
A decentralized exchange, often referred to as a DEX, is a type of marketplace where token swaps are facilitated by smart contracts.
In traditional centralized exchanges, trading is facilitated through order books that record bid-ask offers from participants. Many of these orders then need to be matched together by a Market Maker.
To allow transactions without the need for matching orders, DEX protocols rely on two main components:
- Automatic Market Makers (or AMM) : algorithms adjusting token prices to match supply and demand
- Liquidity Pools : token reserves allowing to serve both buy and sell orders asynchronously
The larger the liquidity pools, the more volume you can trade without negatively impacting the transaction price, an effect known as slippage. To attract liquidity
providers, DEXs reward them with a portion of the trading fees plus some additional rewards for locking their liquidity.
In 2021, the total value of tokens exchanged on DEXs reached $1,000bn and accounted for approximately 1/10 of the total trading volume across centralized and decentralized exchanges. According to DefiLlama, as of September 2022, the total value locked (TVL) in liquidity pools is estimated at $30bn.
3) How does Liquidity provision work?
In theory, providing liquidity involves depositing tokens in DEX liquidity pools to earn part of the transaction fees and other liquidity rewards. In exchange for their deposits, Liquidity Providers receive LP Tokens that represent their share in the Liquidity Pool. These tokens will then have to be redeemed in order to withdraw their initial deposits.
In reality, it’s much more complicated.
First, you have to deposit tokens by pair (ETH/USDC or XTZ/USDtz for example) such that the value of both deposits are equal. If you hold tokens with an unbalanced ratio, you will have to swap part of it and modify your asset allocation. Some platforms offer one-stop single-asset liquidity provision, but they are essentially swapping the assets in your place, and do not necessarily offer the most advantageous rates.
Second, providing liquidity doesn't come without any risks. The most common risk for liquidity providers is “impermanent loss”. In the next article, we will explain what it is exactly and how Securd may offer a solution to that problem. Without going into detail, when you deposit 2 tokens in a liquidity pool and their relative price changes, you will redeem more of the depreciated token and less of the appreciated token. This results in a loss compared to just holding the 2 tokens. This risk can be hedged using derivative positions, or mitigated through diversification but this requires a set of skills and an amount of liquidity that exclude most retail investors.
Finally, DEXs distribute rewards to Liquidity Providers when locking LP Tokens but this requires choosing the right locking period, claiming rewards on time and adding booster to maximize yield. Again, only dedicated professionals can extract the most value through constant monitoring and automation.
Expectation
Reality
As a result, it is not completely newbie-friendly and adds much hassle to part-time investors who already have their hands tied elsewhere and wish to earn a peaceful, stable and passive income.
4) Securd solve the problem through efficient risk allocation
Securd offers an easy solution for Crypto Holders who want to gain exposure to liquidity providing but avoid the hassle.
The “Save” feature of Securd allows for a low-risk passive income opportunity. Here is how it works:
- Place your tokens in the Savings Account
- Your deposit will add up to a pool which liquidity providers can borrow from
- You keep their LP Tokens as collateral
- You earn interest on your savings
Advantage:
You have transferred risks and complexity of liquidity providing onto borrowers who pay you interest for lending additional funds. There is no Impermanent Loss for you and your capital is protected with the collateral. In case borrowers are unable to repay their loans, the collateral is liquidated to cover for it.
For liquidity providers, the Leverage feature of Securd allows to boost their APY by using borrowed funds to increase their position:
- Lock your LP Token in the Collateral Pool
- Choose the Leverage you want: x2, x3….x5
- Securd automatically invests the borrowed funds in liquidity pools and collects the additional LP Tokens
- When you decide, you can deleverage your position and LP tokens will be automatically redeemed to pay back the loans
Advantage:
Liquidity Providers have the potential to increase their return on investment but in exchange carry a liquidation risk that they have to monitor.
A more detailed article explaining the concept of leveraged liquidity provision will be released soon!
5) Unlocking value for the whole ecosystem
To conclude, Securd has addressed several issues that are witnessed with the current state of the liquidity provision market and thus democratizes the access to low risk passive income for a less DeFi-savvy population through:
- Streamlining the process of liquidity provision
- Reducing the level of expertise usually required to participate in such protocols
- Allowing investors to choose their appropriate risk levels
Securd is built on a stable business model, sharing revenues from Decentralized Exchange Pools between fund providers (depositors) and risk takers (leveraged liquidity providers).
In addition, Securd’s solution benefits the whole ecosystem. By driving deposits to Decentralized Exchanges, Securd unlocks the liquidity premium for all stakeholders.
Securd is launching on Tezos in early 2023 and will begin its multi-chain development shortly after.
To keep in touch:
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