When it comes to DeFi lending, it’s no surprise that one of the existing caveats to most protocols is that of variable interest rates.
In short, interest rates being offered for lending today can drastically differ from those being offered tomorrow, as we recently saw with Maker‘s change of the Dai Savings Rate from 8% to 4% and it’s now current (temporary) rate of 0%.
All this goes to say that one of the largest untapped markets in DeFi is that of fixed lending, particularly in a distributed, trustless fashion.
Early today, a new project called the DeFi Money Market (herein referred to as DMM) announced their solution to offer stable interest on popular cryptocurrencies like ETH.
In this article, we dive into the DMM protocol along with examining the capacity for high fixed returns, and what DeFi users should keep in mind when entering new lending opportunities.
How Does it Work?
By leveraging a native flavor called mTokens, DMM pools capital and converts it into fiat currencies which are used to purchase interest-generating real-world assets – particularly car equity loans.
When user’s deposit ETH, they receive DMM’s interest-earning asset – mETH. The same goes with DAI and USDC, both of which are exchanged for mDAI and mUSDC. This process is initially being performed by the DMM Foundation, but the long term goal is for this to be managed by a DMM DAO.
“DMM’s stable interest rates are uncorrelated with the rest of the DeFi market and its wild fluctuations of demand from crypto traders, common in many of the existing DeFi applications today.”
As such, DMM will be offering a 6.25% fixed APY on ETH at inception – the highest of any lending rate currently listed on our site.
We’re excited to announce the launch of the DMM Ecosystem!
You can start earning a consistent 6.25% return on your $DAI and $USDC right now at https://t.co/QRrDc2TlZc#DeFi $ETH
— DMM DAO (@DMMDAO) March 2, 2020
Enter Options
In order for DMM to be able to provide a fixed return, the project utilizes call options which allow for ETH to be repurchased at the price in which it was sold.
“The DMM Foundation will be purchasing call option contracts on ETH/USD. This effectively means we are opening up a long position to cancel out the short position we are taking from selling ETH for real-world assets.”
As far as the fees for purchasing those options:
“The premium/fee for the options contract is paid for by DMM Foundation, but eventually it will be paid for by the DMM DAO using funds from the excess interest generated.”
DMM will initially be using options contracts from a centralized exchange called Deribit, and plans to transition into more decentralized solutions like Opyn or Hegic once they have been battle-tested and have enough liquidity to meet DMM’s expected demand.
Is This DeFi?
While a 6.25% fixed return on ETH sounds fantastic, it’s important to recognize that with higher returns often comes a degree of risk.
Prominent community members like Chris Blec were quick to call out the degree of “DeFi” in the following Tweet:
🚨 Avoid. Avoid. Avoid.
They take your deposit, convert it to fiat *off-chain*, and they say they pay it out in the form of a car loan to a stranger.
There’s no way for you to know what’s actually happening after they take your money off-chain.
This is not DeFi. https://t.co/FWisrzMQEk pic.twitter.com/fNld3lGKt0
— Chris Blec 🔆 1 DAI vote = 65 DAI match (@ChrisBlec) March 26, 2020
When asked for a comment, Chris stated:
“The issue isn’t necessarily with centralized projects. There are plenty of those on Ethereum. The issue is actually with the fact that some of them are dangerously exaggerating their level of decentralization with the goal of gaining more users. That kind of confusion can only lead to problems for both users and for Ethereum as an ecosystem.”
Echoing this sentiment, it’s important to recognize that DeFi opportunities vary in their process, risk and security and that you should always do your homework and lend at your own risk.
However, it is worth recognizing that DeFi does live on a spectrum, and it’s ultimately up to us as a community to enforce where that line is drawn while making sure projects do their best to offer transparency (when appropriate) surrounding how funds are being used.
In regards to the aforementioned Tweet, members of the DMM team encourage those sceptical about the DeFi-nature of the project to read their whitepaper which answers the off-chain concerns. In particular:
“The DMM Foundation has contractual rights to the assets portrayed on the Explorer, which produces the yield from which we pay the 6.25%. That entire component is the reason why we are leveraging Chainlink – to independently and trustlessly post the value of these assets and the ecosystem’s collateralization on-chain for mToken holders to see the health of the ecosystem. We’re even taking it one step further of working with Chainlink to be able to illustrate the movement of fiat funds when it’s in limbo between being pulled out of the contracts and into these assets.”
To summarize, Chris’s point of watching out for project’s touting the word DeFi is certainly merited although we believe that DMM has taken a much more rigorous approach to adhere to the decentralized ethos than centralized lending providers like BlockFi.
Regardless of which end of the spectrum you fall on, we’re excited to see so many innovative lending opportunities being started and look forward to watching them develop in the coming year.
To stay up on all things DeFi Money Market, follow their official Twitter here.
Cooper is the Editor of DeFi Rate and an active contributor to leading DeFi media outlets like The Defiant, DeFi Pulse, and Bankless. He works with early-stage teams through Fire Eyes DAO to incubate governance models and grassroots community development. He is an ambassador to Set Protocol and an author of a weekly publication called Token Tuesdays. To stay up with Cooper, follow him on Twitter.