TLDR: Automatic market maker to offers interest rate swaps. Introducing the CherryDai ERC20, an interest bearing token which represents fractional ownership in the liquidity pool plus any profits generated from offering the swaps. Interest rates offered in swaps are set algorithmically based off pool utilization to align demand with market rates.
- The core concept embodies ideas from Uniswap's Constant Product Automatic Market Maker and liquidity pooling done in Compound, dydx and Fulcrum.
- This document outlines high level overview of how the system operates.
Core design goals:
- Minimize counter party risk for us when boot-strapping liquidity
- Remove any need for an order book or matching ending between buyers and sellers. Just like Uniswap does not have an orderbook, this AMM should not.
- Pool liquidity as effectively as possible between positions. No segmentation in liquidity like with separate order books.
- Simplify the end user experience who buys the swaps. This should be as simple as: I think the rate will go up and want to pay fixed, receive float or I think the rate will go down and want I to receive fixed and pay float and the system offers the best rate possible.
- The system contains two main users:
- Liquidity providers, who deposit Dai into the system and provide liquidity for the AMM.
- Traders who either pay fixed or receive fixed within the swaps and trade against the AMM.
A note on nomenclature
Defining a swap as long or short causes some confusion. In a bank’s treasury area, when they’re paying fixed and receiving Libor - they will say they’re “long” the swap. While a bond trader will think of a pay fixed swap as a synthetic short position - because the position will be profitable if bond prices go down. To minimize this confusion this document will stick to who pays or receives the fixed rate when possible. If a long and short term is required then we will use the treasury definition as:
- If you pay fixed and receive float then you are long. Sentiment is that rates will increase 📈
- If you receive fixed and pay float then you are short. sentiment is that rates will decrease 📉
Pooling liquidity and CherryDai
- Upon depositing Dai into the system an equally valued amount of CherryDai is
minted to the liquidity provider. This represents fractional ownership in the liquidity pool.
- As soon as Dai is deposited it is invested into the money market (Compound Finance for now but could be aggregators into the future) and starts gaining interest.
- CherryDai is redeemable for the underlying Dai + interest + Pool profits. CherryDai is only redeemable if the pool utilization is less than 100%, in the same way that other lending platforms have a liquidity restriction.
- This liquidity pooling results in increased capital efficiency as the same pool is used to support the long and short sides of swaps. There are no order books segmented between different swap maturities with poor capital utilization.
- The creation of CherryDai introduces a new asset class that will in theory yield higher than the current cDai token. This means that end users will buy the CherryDai token looking for high returns. This supports the provision of swaps by adding more liquidity.