Last time we wrote about liquid staking derivatives which wrap the underlying asset into a yield-bearing instrument.
Now let’s say you would like to sell a covered call option on ETH. You would put your coins as collateral, sell an option and collect your premium. It’s quite boring though as you only earning one layer of interest. That’s why DeFi protocols started using the yield-bearing versions of tokens instead of their original ones.
This way, you earn twice - by wrapping your coin into a liquid staking product and then deploy that asset to earn further.
We also previously wrote about Yearn - a yield robo-advisor. If you deposit your USDC in there, you get yvUSDC - your fully liquid stablecoin which is earning interest in the background. Therefore, when you are using your stablecoins as collateral or simply depositing them into yet another protocol / product, why not use the ‘smarter’ interest producing wrapper?
Can we take it one step further? In DeFi the answer is always ‘yes’.
We could take a market-making pool pair, wrap it up:
and deploy it further:
It’s all a bit confusing, but the message here is that due to DeFi composability, every project (i.e. financial product) can be a layer in a tech stack of new, unusual and unexpected combinations of financial products.
COIN → lending protocol (interest-bearing asset - ibCOIN) → [interest bearing assets need liquidity too so let’s provide liquidity here] - COIN-ibCOIN LP → now let’s lever up → so on and so on
The battle for DeFi is therefore the battle for becoming a primitive - the financial / tech layer others build upon. Those who inject themselves in between the layers of the ecosystem, will become the financial operating system of the future.
Author is the Managing Partner of Re7 Capital - a stablecoin centric DeFi fund.