Attention, everyone — our friends at Reflexer Finance have added sETH2 to an experimental pool that allows our users to lend sETH2 to other market participants and use it as collateral to borrow ETH, RAI and other assets.
This Fuse pool is located in Rari Capital’s platform and can be accessed here: https://app.rari.capital/fuse/pool/46.
We are excited to get the ball rolling on this sETH2 integration, but ask you to become familiar with the risks before interacting with this pool.
Please note that this is an experimental pool so at this time rETH2 **will not yet accrue** to the depositors into Fuse. This will be remedied in our next update.
With this out of the way, let’s explore this Pool in more detail.
What it is
This Fuse Pool (called Money Flavours) is designed to allow borrowing RAI and ETH against interest-bearing tokens like sETH2. The idea is that you can preserve your initial capital & staking yield while borrowing against it in order to squeeze out more juice from your stake. This is de-facto leverage.
For example, you may borrow some RAI against sETH2, convert RAI to another asset like DAI, and use it to farm the latest degen coin or buy a car offline. In the meantime, the interest generated from lending sETH2 and staking can be used to cover the borrowing rate or even pay down the loan over time.
However — and this is where one needs to pay attention — the lending and borrowing rates are dynamic, as are prices of RAI and ETH (sETH2). It means that one must always assess how the rates are going to move in the future. Not understanding this may lead to the (at least partial) loss of your initial capital, or make the loan more expensive than originally thought. We will explore these risks below.
How it works
The steps are simple:
1. Supply sETH2 into the pool and earn a lending rate whenever others borrow sETH2
2. Borrow ETH or RAI for up to 50% of the US dollar value of deposited sETH2 (i.e. 50% LTV) and pay a borrow rate for the duration of the loan
Note that you will not be able to withdraw sETH2 from the pool unless you return the borrowed amount + accrued interest.
Also remember that if the US dollar value of the borrowed amount exceeds 50% LTV at some point, your position will be liquidated, ie a portion of sETH2 you deposited will be claimed from you in order to pay down your debt automatically. To avoid this, make sure your borrow never exceeds 50% LTV.
There are several risks one must take into account:
1. Changing borrow rates can make loans more expensive
The more RAI or ETH is lent to this Fuse pool and the lower the utilisation rate (ie proportion of borrowed/available) of these assets, the lower the borrow rate will be.
However, if RAI lenders decide to withdraw their capital from the pool, or if the utilisation rate spikes because of such withdrawal/active borrowing by others, it will cause a sharp increase in the borrow rate, making loans more expensive.
1,000,000 RAI in the pool @ 5% utilization -> borrow rate is 1% (arbitrary number)
500,000 RAI in the pool @ 5% utilisation -> borrow rate is 3% (arbitrary)
1,000,000 RAI in the pool @ 90% utilisation -> borrow rate is 10% (arbitrary)
2. Changing exchange rates between RAI/ETH can force the borrowed amount to exceed 50% LTV.
Whenever sETH2 is used as collateral and RAI is borrowed against it, any appreciation in ETH price vs RAI will force the LTV of the loan to go down, making it more safe. Conversely, any depreciation in ETH price vs RAI will force the LTV of the loan to go up, making is more dangerous (ie susceptible to liquidation).
@ Price 1 ETH = 1000 RAI borrow 3000 RAI against 10 sETH2 -> LTV = 3000 / 10000 = 30% (healthy)
Price change: 1 ETH = 1500 RAI -> LTV = 3000 / 15000 = 20% (healthy)
Price change: 1 ETH = 500 RAI -> LTV = 3000 / 5000 = 60% (liquidation)
About the other parties
Reflexer Finance are the deployers of this pool, which means they chose the price oracles for sETH2, the interest rate model and the LTV. Going forward, the governance of these parameters will require a 24-hour Reflexer DAO vote.
Importantly, Reflexer are also the creators of RAI, a stable currency designed to maintain a stable value, which unlike DAI is **not pegged** to the US dollar. RAI mechanism targets a certain value and adjusts the currency’s supply dynamically based on the fluctuations of ETH which is its reserve currency. For more information on how RAI works, read here: https://reflexer.finance.
Rari Capital’ Fuse is an open interest rate protocol that allows users to lend and borrow digital assets. For more information on how Fuse pools work, read here: https://info.rari.capital/products/fuse/