ETHLondoners Tokenize Loans with Upfront Interest

By March 2, 2020 Ethereum
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Magic or nonsense? That’s the question that kept going through our head while test-running in an attempt to understand just what is this Daj dapp and how on earth does it do what it claims?

The ETHLondon hackathon project, which came second in the Aave competing track, claims they can give you upfront the interest rate for a set period and they also give you a token for the underlying capital.

The token bit is easy. Presumably you first turn eth into a wrapped token WETH, and now this weth is at the command of our code. So we can lock it and give ownership over it to tETH. We can now sell and buy this tETH like normal eth.

Why anyone would want the tea in their eth isn’t too clear, even if they are British, because it’s locked into the savings dapp where it earns interest that has already been taken by the tETH seller.

Still, the eth with tea is kind of a proper futures where to lock the price of eth you get the tea today and then the guaranteed eth delivery whenever it was agreed.

So if I want coffee instead we can create an exchange where you can sell the tea for it, and we can now lock the tea itself to get interest and… yes, we’ve recreated the current financial system but without banks taking their cut and all in a fully transparent manner where we can all see who likes tea and who wants coffee.

Oasis Water

Just to clear your mind a bit, let’s instead get some dai from Oasis because we had not realized just how easy it is now to open a Collateralized Debt Position (CDP).

We’re on the Kovan testnet because Daj is very much a prototype. So we click on setup a vault on oasis, and that’s pretty much it.

The ethereum network quickly confirms our eth collateralization, and now we get a very nice screen:

Simple. The testnet price feed is wrong here, but on the live network it seems to be fine. The minimum is 20 dai, and we had to get testnet eth first locked behind a github account for some reason, but we have dai now so we go to daj.

And there we learn our whole running around to get this minimum dai amount was pointless because the dai bit of the dapp doesn’t work perhaps because they couldn’t finish that part within the very limited time of the hackathon.

Tomorrow Today

The eth bit of the dapp however seems to work, and there we get a nice transaction that has quite a bit of activity within it:

Checking what is going on is a bit difficult here because many numbers change when the transaction is made and you have to account for the gas fee, but we tried it a few times and we do get the upfront interest for the whole fixed period of in this case 9 months and we get it in proper eth.

So to keep track you go to the futures tab where all the relevant data is shown including when we can have our eth back:

We deposited around 1eth in the end. Doing the final calculations we do have our 0.028 eth on Metamask in ordinary eth.

In the red bit it said 0.5 eth. That’s a tokenized claim on the 0.5 eth which can retrieve the actual eth in nine months.

We sent ◊0.4 of it to another test address, but on etherscan and on metamask you can’t see much. So we’re out of tea, with 0.4 of our eth gone.

Gone to the smart contract according to etherscan, a smart contract that has close to 3 aeth and nothing else, aeth being the Aave interest token.

So as this was all created quickly at the hackathon, presumably this “disappearance” is more a User Interface (UI) matter with the token not showing even though we added the dapp smart contract and aeth.

Presuming it is just a UI thing, it seems we can transfer only half of the locked token with this obviously being just a prototype demo, but of an interesting idea.

Upfront Money, But How?

We tried to reach out to the team to understand how they securing this upfront interest, who pays for it or how it is paid, but without much success so far.

They do not quite explain in their hackathon page except to say your eth might be locked longer than the stated period if the interest rate moves against you.

They also say they plan to work on hedging activities and the like, but at a simple form and as we think this might work, it may be through temporary fractional banking of sorts.

As the interest you receive would of course be far lower than the deposit – unless you’re doing it on bZx where the eth lending rate is now a crazy 100% due to what might be a not fully grounded over-reaction after the flashlones wizness – the upfront eth could come from eth others have deposited.

The interest is then earned so it all becomes non fractional, with the algorithm so keeping balance.

The risk is of course the interest rate gets so low you might not have your eth for a long time, but at a certain point presumably the borrowing rate would become too cheap and attractive.

In addition they’re using Aave here, but you obviously can design it in such a way that the bot goes around all dapps shopping for the best rate and the bot might even arb and so on.

So conceptually it should work, with other dapp projects working on something similar too. While the use cases are probably obvious, especially if you intend to hold eth. You can then get a nice upfront bonus, and then maybe use this bonus to gamble trade.

More interesting is the financial sophistication that is now developing in the still very young defi space, which of course comes with risks, but ‘be your own bank’ is starting to become real.

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