Harbor co-incentives for CMST-USC LP collateral on Demex

Goal:
Demex is looking forward to partnering with Comdex to provide deeper liquidity to the CMST stablecoin on Demex. This forum post is to discuss $HARBOR incentives on the CMST-USC liquidity pool token on Nitron, a Cosmos money market. Carbon also envisions a long-term partnership with Comdex by exploring and collaborating on various DeFi areas in the future.

Summary:

The goal of this proposal is to allow a one-time transfer of $5,000 of $HARBOR tokens to Demex’s lending pool for CMST-USC LP token, and co-incentivized by $5,000 of $SWTH tokens. These funds will be used to incentivize lending of the CMST-USC LP on Demex and will further increase CMST’s utility in two ways, first by deepening liquidity for stable swap on Demex, and second by allowing the LP token to be used as collateral to borrow other assets. Since launching, CMST has quickly grown to >$1M in supply and this incentive will help to ensure that it continues to attract more capital to Harbor protocol to mint more CMST.

What is Demex:

Demex (or Decentralized Mercantile Exchange) is the cross-chain derivatives DEX powered by Carbon, and is designed to support any type of financial asset imaginable. Demex aims to make finance accessible and trust-optional while providing an intuitive and familiar user experience.

Nitron is the name of Demex’s lending and borrowing money market. It works like AAVE and supports a wide range of networks and assets. It also has a public liquidation platform, which allows anyone to perform permissionless liquidations on undercollateralized loans via the UI.

Demex exists on Carbon Network, a DeFi-focused L1 Cosmos Network built with Cosmos SDK and is IBC-enabled. The team behind Carbon Network is called Switcheo, a doxxed Singapore Web3 development studio founded in 2018.

Benefits:
This incentive will encourage users to mint more CMST on Harbor protocol in order to pair CMST with USC to obtain CMST-USC LP. This will increase the TVL of Harbor, drawdown fees incurred, and potential liquidation fees, overall increasing the demand and intrinsic value of the Harbor token and the wider Comdex ecosystem.

Additionally, there will be a CMST-USD amplified spot LP pool and spot market on Demex. This amplified LP pool is similar to a concentrated pool which works well for stablecoin swaps with low spreads of around 0.1%, allowing users to do large trade without much slippage. Being able to sell CMST into USD without much slippage allows CMST holders to trade perps on Demex using USD and easily swap back to CMST after they are done with their trade, indirectly improving the utility of CMST as a gateway to trading perps in Cosmos.

Depositing CMST-USC LP token onto Nitron allows it to be used as borrowing power and unlock additional capital. This means users can borrow other tokens such as ATOM or ETH against CMST-USC LP token, and use the borrowed token to perform other DeFi activities such as yield farming or trading.

This will improve the stickiness and retention rate to CMST as users that borrow other assets against CMST-USC LP have to return their loan before being able to withdraw their CMST-USC LP token, and would still need to unpair CMST-USC and send CMST back to Comdex. These extra steps can deter users from redeeming CMST, maintaining more of its new TVL capture.

This will also increase the accessibility of CMST to Cosmos by offering an alternative way to obtain CMST for users, ultimately helping to bring CMST to more people in Cosmos and increase its awareness in the Cosmos community.

Comdex and Demex will also be performing co-marketing and education, in order to onboard new users to both our ecosystems and grow together.

Additional details:
CMST deposits to Nitron will be done via Carbon’s bridge and deposit UI. Once a user has CMST, they can provide liquidity to CMST-USC to obtain CMST-USC LP token. USC is Carbon’s stablecoin, an overcollateralized stablecoin similar to DAI and CMST which can be minted with a variety of assets, including yield-bearing assets like stATOM or even LP assets.

CMST-USC Collateral Money Market Parameters:
Oracle: The price oracle will reference the floor value of the CMST’s price on cSWAP and Crescent with a max value of $1.

Loan-to-value (LTV): 65%

Liquidation threshold: 69%

Liquidation penalty: 20%

Optimal utilization: 0% (will not be borrowable)

Target borrow rate: 0% (will not be borrowable)

Supply cap: 500,000 QTY (about $500k+, can be raised anytime)

Borrow cap: 0 (will not be borrowable)

Projections:

The incentive amount is expected to attract a TVL of around $500,000 of CMST-USC which would give an incentive APR of about 24% which is competitive in the current stablecoin yield farming landscape.

At 65% LTV, if a user deposits $100k of CMST-USC, they can borrow $65k of USD at around 2% APR, to buy more CMST or USC on cSWAP or Demex, to provide more liquidity and send to Nitron and deposit, and doing this loop once would generate an estimated yield of around 45% APY on the $100k CMST-USC deposit.

Distribution:
This program will distribute the authorized amount of tokens over a period of 30 days, starting at the time when the existing program ends.

The Harbour incentive will be distributed to the Switcheo team to be deployed pro rata to users on Carbon Network who deposit CMST-USC LP token in Nitron’s lending contract via Carbon’s external incentive feature on its Collateralized Debt Position (CDP) module.

This proposal, if accepted, will spend $5,000 worth of Harbour tokens from the community pool at that point in time, to dev team address at comdex1azgv7znw27cxfs66hj0ak0yv5a4xvtejw6qheq on Comdex network in order to fund the external incentive module on Nitron according to the parameters of this proposal.

In the future, Harbour may want to launch similar programs with the Switcheo team with different parameters - any future program is outside of the scope of this governance action and will require a new proposal.

Consolidated reference links:

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I am in favor of trying this, since the ask is not so big.

There is a part of which I am quite sceptical though;

This feels like a circle where collateral is used to gain more CMST, to provide more collateral. Meaning that collateral is used indirectly as collateral, which is a very very very very bad financial instrument imo, since it means that we are making air using air. Can you clarify that part?

Hey Leonoors, great question and yup that’s right that collateral is used indirectly as collateral, but up to a certain extent as the LTV is not 100% and the collateral is locked up and the loan is overcollateralized.

It would be akin to collateralizing a liquid money market fund to borrow USD to buy more money market fund, except in this case its all liquid and instantly redeemable with no lockup, and stablecoins remain at $1 usually, and there are caps in place to prevent it from growing much bigger than the available liquidity on-chain.

Hope that answers your question.

I like the proposal & looks beneficial for all parties.
Any rationale behind choosing $5,000 of $HARBOR tokens and $5,000 of $SWTH tokens as the incentives for the CMST-USC liquidity pool token on Nitron?
(sorry if its mentioned, just wasnt clear to me)

Partially. How it solved that people can iterate their way up?

I mean, starting with $100k you can borrow $65k.
Using that $65k as deposit you can borrow a new $42.25k.
Using that $42.25k as deposit you can borrow a new $27.46k.

After 10 iterations you have borrowed a $183.2k with only an initial $100k.
So it is effectively undercollateralized already on the 2nd run and it gets worse if people starting redoing it. And since we will have HARBOR incentives for people minting CMST it might even be beneficial to take this risk.

How is it tackled that this undercollateralisation is covered in such a way that the protocol is not build on empty loans?

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