Bridge-Only Silos to Greatly Improve Capital Efficiency
Problem: When going from Asset A to Asset B the LTV is dilluted greatly.
As an example if the BTC and YFI Markets both have a 50% LTV then the following occurs.
- Deposit $100,000 in BTC.
- Borrow $50,000 in USDs.
- Deposit $50,000 USDs.
- Borrow $25,000 in YFI.
- This effectively means the true LTV for BTC to YFI is 25%
I Propose as a solution we create a third Silo or rather an extension of the USDs Silo where in the LTV is greatly increased for transactions that are used only as a bridge to a different loan. LTVs can be raised to 85% (or any other number or dynamic model that can be discussed here) so long as the bridge asset never leaves the system. For this to work Liquidations must happen simultaneously, so a liquidation of the second loan would mean a liquidation on the first.
WBTC → USDs to USDs → YFI
In the case of Liquidation the following two things occurs in parallel;
- WBTC Collateral is sold for USDs.
- USDs Collateral is Sold for YFI.
The Buy and Sell effectively cancel each other out and therefore have no bearing on the peg. The only thing that changes is the balance of USDs between pools because the first loan’s USDs Borrow Balance is constantly decreasing as the second loans Collateral Balance constantly increases due to interest rates.
These Bridge-Only Silos would use the main Liquidity from the primary Silos but along with this I propose we also enable a Pool Consisting of USDs that cannot be used any other way and can be increased/decreased by the DAO. This will effectively allow the DAO to seed different pools using risk assessment.
Essentially the DAO would Mint USDs through governance and provide it to this Bridge-Only Silo allowing it to connect to the rest of the network at a capped amount. For example, let’s say we have a coin such as YFI with very little liquidity in it’s SILO but we trust the project and it’s liquidity enough to know 1M USD of borrowing power is sustainable. The DAO would deposit this 1M USDs into this borrow-only Silo allowing the token to connect to all other pools up to this limit while removing all risk from the USDs Stable-Coin.