Adding SOV as a Collateral Type in Sovryn?

Collateral in Sovryn: Types and Uses

One of the powerful features of Sovryn is the ability to borrow against your (crypto)assets.

This allows users to gain liquidity without ever having to sell - which means you can hold your assets long term, benefit from long term HODLing, and still pay rent, trade and go on a well deserved vacation. This also has the benefit of being extremely tax efficient. If you don’t sell, there are no capital gains taxes to pay off. In many jurisdictions, debt repayments can be a tax write off.

Assets which can be used as collateral in the Sovryn system, also provide another benefit. They can be used as collateral for margin trading. So, for example, if you are bullish on both SOV and BTC - you could acquire and HODL SOV, and then use it to go long on BTC - increasing your position on both.

What’s the potential downside of adding a new asset as an available collateral type to Sovryn? It creates potential risk for lenders. If the asset loses value very rapidly, it might be difficult to liquidate positions, or to keep lenders fully collateralized.

SOV as Collateral?

Currently the assets allowable as collateral in Sovryn are:

  • BTC - the King of Collateral
  • Bpro - a leveraged play on BTC
  • DoC - a Bitcoin-backed stablecoin
  • USDT - The largest of centralized stablecoins, soon to be added to Coinbase

These are strong forms of collateral? Do we feel that SOV can and should join this list?

Let’s start with reasons against:

  1. SOV is a new asset that has only a short trading history. It has no long term volatility track record
  2. SOV is currently only traded on one venue, potentially making it more vulnerable to manipulation

Ok, so what are the reasons in favor?

  1. SOV is held by an extremely distributed set of holders. There are no large addresses (whales) with liquid funds - making manipulation unlikely
  2. SOV trading over the last 2 weeks has been extremely robust, with low volatility, relatively high volumes and the ability to maintain and grow its value even in the face of general declines in the rest of the market.
  3. SOV is not a speculative “cryptocurrency”. If staked or bonded, it has very clear business case and revenue stream - to which DCF analysis can be applied
  4. For the SovrynBTC peg, SOV will be the collateral asset. It would be beneficial to start experimenting with its use as such before the peg is deployed.

Very interested in the community’s thoughts and feedback. If there seems to be a strong desire to add SOV as collateral, I’d be happy to prepare a SIP.

13 Likes

Theres more pros than cons, so logic dictates the answer be yes

1 Like

There’s more positives with this. A few projects have already done this. It increases incentives for hold and adds another utility. Hope this can be implemented fast.

2 Likes

I say GO FOR IT😎

“Stay fucking SOVRYN”

1 Like

This is an absolute must when it comes to appreciation of the asset.

Composability across chains so SOV can be used as collateral with other DeFi protocols is integral to the awareness of the project and use case.

Ultimately this is about users sovereignty with their money - provide the tools for users to do whatever it is they want.

Hard yes from me

4 Likes

I think eventually we should be able to use it as collateral as many people will hold them anyways when using it for staking

Lending it for the user is like staking it where instead of earning fees you borrow against

The risks you mention are very relevant though and we have not yet been exposed to a sell off (which is great). But we don’t know … so I’m wondering if this can be announced as something that will happen but in X nr of months so we can observe the stability?

Finally it’ll be good to define the following:

  • will borrowers continue to be able to vote? Maybe yes but without earning the additional voting weight you get when you stack for longer periods?
  • will borrowers using SOV as collateral still be earning fees that can be used to pay the interests automatically?. This one is tricky but if I’m an SOV holder and I know I “earn” a certain percent that i will lose when using it as collateral … then that makes my loan more expensive than if I simply stack my SOV and use other coins for collateral so I can continue to earn fees with the SOVs

Cheers

5 Likes

I’m not en expert yet, so forgive my potential dumb comment on this:

Allowing SOV being a lending collateral would open SOV traders a new route to effectively swap SOV into BTC: by borrowing BTC with no intention to pay back, deadline liquidation would pay the debt with SOV collateral. The point is the price ratio SOV/BTC on swap and on this lending scenario. If the former is higher, no problem. Otherwise we should anticipate impact on SOV intrinsic value; maybe lenders are not expecting SOV collateral, rather BTC principal plus interests.

Just a piece of thought, maybe it’s nonsense, but I prefer to share just in case.

2 Likes

Well, they would lose more than they gained. The collateral ratio I think i would propose is 150%.

However, a similar idea is this: An interesting upside is it will allow those who have SOV but want more, to borrow BTC and purchase more SOV.

2 Likes

Thanks @nbourbon - I think we can guard against risks by requiring a high enough collateralization (LTV - loan to value) ratio.

With regards to voting, the current philosophy of Bitocracy is that you give up liquidity to participate. This is because by forcing stakers to give up other economic benefits, they must be very motivated to have the best interests of Sovryn in mind.

5 Likes

Hi, it’s certainly something we’re all thinking about.

In my opinion the weaknesses need to be narrowed down. I think it is prudent to wait a few more weeks, which will allow us to know how SOV will perform in the market once it starts trading outside Sovryn.

Just a little more patience.

3 Likes

I’m fairly uninformed but the concept of being able to use it as collateral seems like a win for the project as a whole. Rewards the hodlers, while giving them access to capital if they need it. A big hell yes.

Loans against staked SOV is more intriguing than loans against SOV.

My thought process:

  • If you own SOV and need liquidity, why would you not just sell it?
  • Well logically you won’t sell because you want to hodl it.
  • But if you plan to hodl it why wouldn’t you stake it?
  • If you stake it, you can’t borrow against it.

The logic doesn’t naturally flow to HODLing and borrowing against SOV, but it does work for the stakes. As long as you don’t create another token to represent stakes, it’s a superior solution.

4 Likes

This is awesome! I am glad to see it.

Not an expert so forgive me if I am wrong, I have in mind a token that the sole purpose of it is to be put as collateral to get lower lending interest, aside some minor uses. So it’s that enough to encourage as use SOV and to that direction? I mean SOV is definitely much more than that.

100% support this and would like to see the SIP added for voting. Thank you Yago!

1 Like

You wouldn’t want to sell because of the tax burden. Ideally the loan is made to somebody who can afford to pay back the loan with some real world income, that just happens to be cash strapped for the moment. They don’t pay 20%+ cap gains tax, and lenders get some interest.

I’m wondering how the staking rewards and voting would work if the collateralized SOV was staked, or if it’s possible.

this is an excellent point.

I believe it would make sense to first observe how SOV will behave once it’s being traded outside of the dapp. Its current robustness could be due to “biased” investors who actually believe in the product whereas in the world out there many people just buy into the hype, and it’s yet to be determined how confidently people will catch on to the long-term vision of this product without direct influence of their twitter contacts/friends/tg contacts etc.

So I think we should at least wait until the Eth and BCS chain bridge are finalized so we’ll will have a much better understanding of SOVs stability beyond its current only silo.

7 Likes

Fuck yes, lets do this! Shut up and take my vote!

Overall a great way to add an additional use case for the token. As suggested by others, it’s probably for the best to start with a higher collateralization rate and gradually scale it down, as the token and our small ecosystem matures.

2 Likes