Links
https://blog.makerdao.com/making-maker-march-2020
Why lend/borrow?
- Short eth:
- Deposit USD in Aave
- Borrow ETH from Aave
- Sell the borrowed ETH into USD
- ??? wait for prices to drop
- Buy back the ETH at lower price
- Profit!!
- Levered long eth:
- (have usd) Buy ETH ←100% exposure to ETH
- Deposit ETH in Aave (100$ worth of eth)
- Borrow USD from Aave (70$ worth of eth)
- Buy ETH with borrowed USD
- ??? wait for prices to go up
- Sell the ETH at higher price
- Profit!!
- Yield arbitrage between markets
Uniswap
Res A amount worth the same as Res b amount worth
e.g. pool containing 1000 USD and 2 ETH ⇒ 1 eth is worth 500 usd
Invariant: amount a * amount b = constant — (xy = k)
I will deposit 1000 usd, and withdraw x eth. What is x?
2000 USD * 2-x ETH = 2000
x = 1 eth
^ no fee example
https://debank.com example of a third party UI (front-end) that directly interacts with other protocols’ smart contracts (backend)
https://www.nansen.ai/ “Identify opportunities before everyone else”
https://blog.makerdao.com/making-maker-march-2020/ when collateral value drops so quickly, the system becomes undercollateralized
Week 2 workshop 1: Flash Loans
Definition: A loan that is paid back (sometimes with fee), within the same transaction.
Use cases
💡 Note that anything that is enabled by a flash loan is also doable by somebody with a large amount of assets.
- Reduce transaction complexity: Leveraging / deleveraging a loan, changing a loan’s composition (collateral, refinancing, etc)
Deposit 100$ into Aave —> $80 borrow power Borrow $80 worth of ETH, and deposit it back into aave —> $100, $80 in eth, and I owe $80 in eth —> $64 borrow power remaining
...
Flash loan a large amount of $, deposit it into aave —> 80% of a large amount borrow powerBorrow end amount —>
Aave pool has 50% collat ratio:
deposit 1, borrow 0.5, deposit 0.5, borrow 0.25, ... → 2 in collateral, and 1 in borrow
Flash loan X, deposit X+1 into aave, borrow 1, withdraw X-1 —> 2 in collateral, 1 in borrow, (end up with X in my wallet) —> Repay flash loan of X.- Democratizing arbitrage and liquidations → (MEV)
Market 1: buy 1 ABC for 100000Market2:sell1ABCfor80000Market2:sell1ABCfor80000
buy from market 2, sell on market 1 —> $20000 profit (you need $80000)
Stablecoins USDC, USDT, DAI, …
Hacks / Protocol Vulnerabilities
https://coinmarketcap.com/alexandria/article/what-are-flash-loan-attack
Naively calculated on-chain prices can be manipulated within a transaction.
djSynths
deposit ETH → djETH
deposit USDC → djUSDC
allow you to swap djETH ↔ djUSDC for a price. That price is uniswap’s ETH-USDC pool price.
Uniswap ETH-USDC spot price = amount of ETH / amount of USDC
E.g. 2 eth, 100 USDC → 1 eth is tradeable for 50 USDC.
I want to buy 1 eth → (2-1) (100 + X) = 2 100 → X = 200 – 100 = 100$ per eth.
Need to pay 100 USDC to buy 1 ETH.
I want to buy 1.5 eth → (2-1.5) (100 + X) = 2 100 → X = 200/0.5 – 100 = 300.
I want to buy 0.0000001 eth → 50$ per eth (spot price)
Flash borrow 300. Buy 1.5 eth from uniswap pool → uniswap pool 0.5 eth, 400 USDC (spot price 800$ / eth)
Swap 100 djETH for 800 * 100 = 80000 djUSDC.
Sell 1.5 eth into uniswap pool, get 300 USDC back → uniswap pool 2 eth, 100 USDC
Pay back my 300$ flash loan
- Price oracle (chainlink)
- use TWAP prices
- sprinkle fees around
Implementation details
Aave Flash Loans https://docs.aave.com/developers/guides/flash-loans
https://github.com/aave/code-examples-protocol/blob/main/V2/Flash Loan – Batch/MyV2FlashLoan.sol
File 52 of 79 : LendingPool.sol https://etherscan.io/address/0xc6845a5c768bf8d7681249f8927877efda425baf#code
Aave charges 9bps for the flash loan (quite expensive, considering Curve’s 3pool charges 3bps for a swap!)
Exercise: Find an example in the wild through Dune Analytics
Office Week 2 Hours 1
On the topic of axie infinity:
https://duckduckgo.com/?t=ffab&q=mmorpg+economy&ia=web
https://duckduckgo.com/?q=world+of+warcraft+economics&t=ffab&ia=web
https://www.tokenterminal.com/home
Week 2 workshop 2: Synthetics
Synthetics are a subset of derivatives. It usually means a “delta one” derivative. I.e. the synthetic asset tracks the underlying asset almost 1-1.
Why even have synthetic assets?
- Underlying asset is difficult to acquire or trade
- Foreign stocks, complicated rules (e.g. dividend tax treatment across countries)
- New exchange
- Small float
- Example synthetics in tradfi: ADRs, futures, swaps,
- Different way of leveraging (more capital efficient)
- Stablecoins are a type of synthetic asset
How do synthetic assets work?
Perpetual contracts: https://medium.com/perpetual-protocol/why-use-perpetual-contracts-and-how-do-they-work-57e4a44fb79a
Futures: https://help.ftx.com/hc/en-us/articles/360024780511-Complete-Futures-Specs
Synthetix
Kwenta is the UI to trade between s-assets.
How do trades work?
- What determines trade price?
- What’s the trade fee?
- What’s the market impact?
- Who is your counterparty?
Twitter thread on doubting yourself when trading: