Abracadabra.money: DeFi Stablecoins via MIM and SPELL
Abracadabra.money issues stablecoin loans in magic internet money (MIM) by collateralizing interest bearing tokens, also known as liquidity provider tokens.
Updated March 22, 2022 • 4 min read
Abracadabra.money has created decentralized stablecoins via innovations in collateralization. These crypto-collateralized stablecoins are designed to unlock liquidity in the decentralized finance (DeFi) space by minting liquid tokens built upon collateral from often illiquid interest bearing tokens (ibTKNs). A stablecoin known as magic internet money (MIM) underpins the Abracadabra crypto ecosystem, while the additional SPELL and sSPELL tokens facilitate governance and incentivize market participation.
What Is Abracadabra.money?
Abracadabra.money is a decentralized crypto lending platform that allows users to collateralize digital assets in exchange for stablecoin loans. However, Abracadabra is unique in that it utilizes interest bearing tokens (ibTKNs) — a type of liquidity provider (LP) token — as collateral. These ibTKNs are becoming increasingly common throughout the decentralized finance (DeFi) space. They generate continuous returns, increasing in value the longer one holds them. This innovation helps set Abracadabra and its subsidiary technologies like SPELL token and magic internet money (MIM) apart from the myriad DeFi lending platforms available.
Before examining the unique features of Abracadabra.money, it’s important to revisit how collateralized stablecoin loans work. On most DeFi protocols, crypto loans are over-collateralized, meaning that the collateral value must always exceed the loan value. For example, if an investor wants to take out a loan of 100 DAI on the MakerDAO platform, they would need to put up at least $150 USD in ether (ETH) as collateral, equating to a 150% collateralization ratio. Once the DAI loan is issued, it’s managed through a system called collateralized debt positions (CDPs), which are smart contracts that manage the ratio throughout the course of the loan. Many investors collateralize their loans well over 200% to buffer against crypto market volatility and avoid liquidation.
How Does Abracadabra.money Work?
Despite the liquidation risks associated with stablecoin loans, they enable investors to amplify yields while retaining ownership of their digital assets. For example, investors can sell or reinvest their loan proceeds, promoting more complex trading strategies. In general, DeFi protocols like Curve, Yearn, and SushiSwap mint ibTKNs as part of the loan structure. Abracadabra.money aims to further decentralize DeFi investment opportunities by introducing these ibTKNs as collateral in stablecoin loans.
Abracadabra utilizes these collateral deposits to mint a USD-pegged stablecoin known as magic internet money on its multi-chain lending platform. That means that unlike most stablecoins on the market, MIM tokens can be easily transferred across a panoply of blockchains. Further, the project team asserts that MIM is a better stablecoin because it’s not collateralized with centralized digital assets.
Abracadabra Tokenomics: SPELL Token vs. sSPELL Token
Although the MIM stablecoin is the primary token within the Abracadabra ecosystem, the SPELL token and its close relative the sSPELL token each facilitate network governance and incentivize market participation. The SPELL token facilitates governance on the Abracadabra crypto platform and has a total supply of 210 billion, distributed as follows:
Global farming incentives (63%): These tokens are used to incentivize particular LP pairs and mining programs. This targeted distribution helps ensure adequate liquidity across markets on the platform.
Team allocation (30%): These tokens have been retained for founding team members.
IDO (7%): The initial supply of SPELL tokens was distributed to early project supporters via an Initial DEX Offering (IDO).
Additionally, the similarly named sSPELL token facilitates fee-sharing and governance on Abracadabra.money. Users can stake SPELL tokens to mint sSPELL, enabling fee-sharing in the SPELL staking pool and participation in the Abracadabra DAO. sSPELL crypto holders automatically earn fees proportional to their share of the SPELL staking pool. In addition, because those holding sSPELL or the SPELL/ETH Sushiswap LP token can participate in governance, staking SPELL doesn’t have to mean forfeiting governance rights. However, it’s important to note that all sSPELL is subject to a 24-hour lock-up period, implemented to stabilize the staking pool.
Yield Farming and the Abracadabra Crypto Platform
Abracadabra’s MIM token introduces a more “decentralized” stablecoin to the DeFi ecosystem, enabling new yield-generating opportunities. To explain these novel strategies, it’s worth examining how the Abracadabra crypto protocol integrates elements of conventional yield farming and collateralized stablecoins.
Yield farming usually involves depositing (staking) liquid assets like wETH or SUSHI into yield farms on platforms like Yearn.finance and SushiSwap. In exchange, users receive illiquid ibTKNs such as yvWETH and xSUSHI, which represent their original deposit plus any accrued interest. In short, users deposit liquid tokens and withdraw illiquid tokens.
Conversely, when minting a conventional stablecoin like DAI, users deposit liquid assets like ETH or USDC as collateral and receive equally liquid DAI tokens. In other words, users deposit liquid tokens and receive liquid tokens.
One benefit of Abracadabra is that it combines both approaches, allowing users to deposit illiquid ibTKNS like yvWETH and xSUSHI as collateral to mint liquid MIM stablecoins. As a result, Abracadabra unlocks stranded capital in the DeFi ecosystem, opening up leveraged yield farming opportunities.
Leveraged Yield Farming on Abracadabra.money
Abracadabra.money users can leverage their DeFi yield farming positions to earn even more fees. While there is a liquidation risk associated with this practice, it introduces an entirely new way of market making in the DeFi ecosystem. Here’s how it works. Let’s say a user wants to earn interest on $1,000 worth of USDC.
They deposit 1,000 USDC into a Yearn-USDC Vault, which generates a hypothetical 4.5% annual percentage yield (APY). After depositing USDC, the user receives yvUSDC, an ibTKN that represents their initial investment plus accrued interest.
The user then deposits their yvUSDC tokens as collateral to take out a loan on the Abracadabra platform. Users borrow from “cauldrons” of MIM on Abracadabra. Each cauldron integrates a preset interest rate, collateral ratio, borrow fee, and liquidation fee. In our example, the cauldron for yvUSDC stipulates an interest cost of 0.8%, and users can borrow up to 90% of their collateral value.
The user is earning 2.5% on the USDC they deposited to Yearn, has taken out a loan on Abracadabra that costs 0.8% a year, and holds MIM tokens representing 90% of their USDC value. As a result, they have $900 worth of liquid MIM and are still earning a net 3.7% APY on their original deposit (4.5% APY on Yearn, minus the 0.8% interest charged for the loan on Abracadabra).
Technically speaking, the user could continue leveraging this position up to 10 times with the Abracadabra crypto lending engine. For example, behind the scenes, the protocol will:
automatically exchange the loaned MIM tokens back to USDC;
deposit USDC to the same Yearn Vault generating a 4.5% APY;
use the minted yvUSDT LP tokens to borrow more MIM on Abracadabra; and
repeat this process until the user achieves the desired leverage.
As a result, a fully-leveraged $1,000 deposit could earn a yield on several thousand additional dollars, less the loan interest costs. It’s worth noting that this hypothetical example only refers to one source of collateral, highlighting how complex leveraged yield farming can become when utilizing Abracadabra.money. This dynamic introduces new yield farming opportunities and provides the DeFi ecosystem with a more decentralized stablecoin that’s engineered for cross-chain compatibility.
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