Smart Collateral
Using interest-bearing tokens as collateral and create yield-enhancing strategies within options
TL;DR
- Smart collateral allows users to use interest-bearing tokens as collateral while interacting with the protocol.
- Providing liquidity with options tokens that hold smart collateral can increase the operation’s overall return since it accrues returns from three different sources: the AMM returns, the AMM fees, the yield from Aave.
- On top of that, if liquidity provision happens in Polygon, LPs unlock another layer of their stack of rewards: the liquidity mining incentives from Aave and Polygon.
- Selling fully collateralized options with smart collateral translates into creating a yield-enhanced strategy within one operation.
Smart Collateral
The DeFi environment is highly composable, which is one of the most advanced features of our market when compared to traditional finance. It is natural to think that collateral should be, too, composable. Or, as Dan Elitzer mentioned early in 2019, Suplerfluid or Liquid Collateral.
Leveraging this concept, we created what we call Smart Collateral. It allows users to use their interest-bearing tokens as collateral when selling an option or providing liquidity to the AMM.
Smart collateral turns idle collateral into working collateral.
Collateral doesn’t have to be completely inefficient. It can work for you and it should.
Users can use aTokens from Aave as collateral while interacting with the Pods protocol, which unlocks interesting new ways of using options altogether. When using these aTokens on Polygon, another layer of stacking rewards appears with the liquidity mining program from Aave and Polygon.
In the future, we expect to integrate more collateral types into the Options Instrument component of the protocol and expand even further the possibilities for users.
Since our protocol has a modular architecture, there are multiple ways of using smart collateral within Pods:
- As an options tokens LP.
- As an option seller.
- As a stable asset LP.
The Options AMM always holds two assets for every option series: the option token (ERC20 that holds collateral and contract rules) and the stable asset pair. To make it easier for users to provide liquidity in the AMM, there is a zap on the app level that automatically creates options tokens and adds liquidity to a pool.
If the option has smart collateral enabled, users can use their aTokens (aUSDC, aDAI, or others) to supply liquidity to the zap.
Provide options tokens as liquidity in the pool
If the user chooses to provide liquidity to the AMM, they will receive, in addition to the interest from Aave, the AMM trading fees, the AMM returns, and the MATIC tokens (if on Polygon).
It is relevant to highlight that LP returns are hard to predict and can be a profit or a loss, depending on what happened with the option and the pool over the provision time. For further information please check our whitepaper and the simulations we've been exploring.
Selling options
If the user chooses to sell options in the AMM directly, they will receive the current premium at market price in return. They will continue to accrue interest from Aave as well as receive Polygon's incentives until the withdrawal.
Providing stable assets as liquidity to the pool
If the user prefers, they can provide aTokens directly to the pool as liquidity and accrue Aave yield, AMM trading fees, and Polygon's liquidity incentives (if on Polygon).
Superfluid collateral within options resulting in yield enhanced products
A user is also creating a new product by combining a yield-bearing token with a sold position in an option.
Some users have been selling ETH put options with a physical settlement to buy the underlying asset (ETH) at a discount. Using an interest-bearing token as collateral, this user either buys the underlying asset at a bigger discount or has a higher yield on their collateral.
DeFi, by nature, is composable and is capable of offering different token combinations within one ERC20. Soon we’ll be able to use smart collateral not only from Aave but also Compound, Yearn, Curve, Sets, Lido, StakedETH, PoolTogether, and other protocols.
Looking forward to what's coming!
Mainnet is coming 🤗
While we get ready, it would be great to hear from you in our Discord. Drop your ideas, feedback, and suggestions, and let us know what you need.
About Pods
Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
We invite you to take the first step in your new mission: start testing the app on app.pods.finance
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