The Aave loan service presented A new market based on liquidity tokens from Uniswap, which allows depositors Order assets borrowed against these synthetic tokens.
The Uniswap marketplace was launched and announced on May 28th allows holders of these specific tokens to use them as collateral Borrow crypto assets from the platform.
Each liquidity token represents the property of a group of Uniswap liquidity providers and can be exchanged for real tokens At any time.
Liquidity providers receive part of the business fees earned through the Uniswap protocol, which is one of the many ways to generate residual income through decentralized financing (DeFi).
Liquidity brands you cannot borrow This means that depositing these tokens on the Aave platform will not generate any additional income.
Stani Kulechov, CEO of Aave, told Cointelegraph that this is will be activated later This allows users to receive interest two platforms at the same time.
However, an interesting application of this system is open leveraged liquidity funds. As Aave wrote, this will “significantly reduce the slip of decentralized exchanges” because liquidity funds can be inflated by borrowed money.
To make it economically feasible, there are trading fees You would have to balance the interest rate of the loan and the possible problem of permanent loss.
Since trading fees and interest rates are variable, this is could lead to complex interactions between the two platforms when the economic balance changes. However, the loan factors for these tokens have been set at fairly conservative thresholds of less than 70%, which limits the maximum achievable leverage.
DeFi compatibility risks
A big risk that Aave is dealing with is that correct price of these liquidity brands. Since these are fully synthetic tokens, the value of which is algorithmically derived from the underlying assets, Errors in Uniswap could also threaten the Aave system.
For this purpose, the developers have created a contract as would independently derive the value of the token based on the number of underlying assets in Uniswap contracts. Deviations from the price of a token in Uniswap and from the real market price can still occur in certain circumstances What Aave believes would be an attack on the platform.
Therefore the system uses Chain link oracle for calculating the “true” value liquidity funds, which will become the primary valuation method during these discrepancy periods.
However, these interactions can lead to a “coupled risk between the two systems,” as Ken Coeleter, partner, adds Electrical capital, to Cointelegraph. Especially for Uniswap, The size of your liquidity funds depends on the Aave protocol.
Deeter noted that the effects of “increased volatility” on secured loans can appear in a single log citing the MakerDAO example. Borrowers can easily convert Dai (DAI) to Ether (ETH) and convert it back to Maker (MKR) would increase your risk using the protocol.
But the risks of these practices remain depending on the system parameters, Deeter concluded:
“I think the top question is how these credit systems balance different types of guarantees (so that one that goes wrong doesn’t bring the whole system to a standstill) and what recapitalization systems they have in case something goes wrong.”
Kulechov said Aave uses a specific risk framework to prevent instability and found that interdependencies “are not so different from traditional finance commitments.”