Overcollateralization (OC) is the normal borrowing play: borrow to keep exposure on a held asset, while using the borrowed assets in everyday life (groceries, mortgage, the usual). On first glance, DeltaPrime's walled garden makes it seem impossible to do this. After all, the cost of trustless undercollateralization is the inability to withdraw borrowed funds right?
Wrong. Efficient OC not only enables investors to use the exact same amount of fiat IRL-while keeping exposure-as on an overcollateralized protocol. Moreover, they can efficiently use their collateral simultaneously.
The Efficient OC is perfect for investors who want:
- To simply copy their existing strategies
- To liquify an asset, without losing exposure on said asset
- Their collateral liquid and yielding, even while fully functional as collateral
In this strategy, an investor is planning to propose to his wife with a nice $700 wedding ring, yet to be purchased. While he does have the money to buy it right now, he holds it in BTC.b, an asset he expects short-term bullish price-action on. The total value of the BTC.b is $1000. He has three options:
1) Save ~250 a month and propose after three months. 2) deposit $1000 BTC.b on Avalanche's main overcollateralized protocol, borrow $700 USDC against it, and get liquidated if BTC.b drops by 6.6% before mooning + save 3 months in order to unlock the BTC.b for DeFi.
- Deposit $300 BTC.b as collateral in Prime Account
- Sell $700 BTC.b for wedding ring
- Borrow $700 USDC
- Swap USDC for BTC.b
- Use $1000 BTC.b for DeFi
By using strategy 3, the investor can immediately liquify his assets, while keeping $1000 of BTC.b exposure. While from his perspective he borrowed undercollateralized, the protocol covers $700 in borrowed funds with $1000 in BTC.b, leaving him with the exact same exposure as in option 2: If BTC.b doubles in value, after repaying, he has the same capital gains as in option 2. Bonus: where in option 2 the BTC.b is locked as collateral, yielding 0.11%, with DeltaPrime, the investor can use the full $1000 BTC.b in integrated protocols for additional yield, potentially out-earning his interest. Efficient overcollateralization.
This way of borrowing does not lead to higher liquidation risk: with option 2, at the time of writing, liquidation happens if BTC.b drops 6.6% in value (max LTV = 75%). On DeltaPrime, liquidation happens if BTC.b drops 16% in value (max LTV USDC -> BTC.b = 500%). Moreover, the amount liquidated in option 2 is 50% whereas, with DeltaPrime, only 25% gets liquidated. This means a softer cushion for the mistaken investor. Leaving him with more collateral should his price expectation turn out to be wrong.
- You have sold the amount you want to keep exposure on
- You borrowed USDC on DeltaPrime, and swapped it for the desired asset
- (Optional:) You out-earn your USDC interest rate in a farm or LP
- 1.The goal of this strategy is to liquify part of your assets without losing exposure. It is very likely the Account APY is not at its optimal level, and possibly even negative (as it would be elsewhere).