I’ve been keeping a close eye on what’s happening at Dharma for a while now. I love the idea of programmatically managed debt issuances. I know there are issues — covenants and the oracle problem, for one — but I think that if and when those issues are solved, you could get creative with tokenized structured finance in ways that you couldn’t with traditional equity. I actually low-key pitched building a Dharma underwriter for oil and gas mezz debt and drillcos to a broker dealer with whom I was interviewing for a totally unrelated job in foreign exchange. They didn’t give me an outright no to the underwriter (they should have), but I didn’t get the job. (In retrospect, a great miss but that’s neither here nor there).
This is all to say that when the Dharma team announced Lever and a teaser rate to borrow DAI at 10 bps for a month, I was paying attention and signed up for the alpha waitlist. ETH was sitting around $130 and I figured I’d lever (smh)up a little just to take the platform for a spin. Unfortunately, I happened to see the above tweet the day I got off the waitlist, so instead of just buying more ETH, I thought I’d give the trustless carry trade a go.
And it worked. When you send it ETH, the Lever smart contract rewards you with DAI and asks that you return it in 28 days with a little bit of interest. As the value of ETH fluctuates, Dharma keeps you informed.You get emails whenever your collateralization ratio drops below their safety threshold (150%). My liquidation point was $113ish, so I sort of ignored these reminders.
Fresh DAI in my wallet, I signed up for an account at Nuo and sent it off as a ‘Reserve’, available to be borrowed at a rate their smart contract determines based on supply and demand. I was quoted around 22% (apr). A couple days later, I started to see interest accrue.
And that’s essentially it. I haven’t closed the position yet, but imagine it’ll four Metamask transactions and done. I’ll be slightly wealthier in DAI terms and my ETH position will be unchanged. Note: the economics of this trade are blown to bits by the overcollateralization on the Lever side of things. Just absolutely destroyed.
So, if it’s not going to make me rich, what did I get out of it?
One of the narratives that’s been kicking around since I started following crypto two years ago is this idea that once tools are built which abstract away the complexity of the underlying transactions, user growth for the asset class will go parabolic. Both Lever and Nuo are sleek. They are almost too sleek. There’s actually not a ton of information on either dashboard about what your loan or debt is doing on a daily basis.
I looked around and haven’t been able to find an explanation of what happens when you get liquidated on Dharma. I would assume it’s similar to a CDP, but who’s handling the process? I doubt it’s happened to anyone, as ETH hasn’t dropped below about $128 since the product launched. But the dynamics would be nice to understand ahead of time. I’ve reached out to them and will update accordingly.
You’ll also notice that interest isn’t explicitly broken out anywhere. Obviously it’s (amount outstanding - principal), but that amount outstanding number is generated on day 0. Does that mean interest doesn’t actually accrue daily? And if that’s the case, what happens if I close my loan early. Am I on the hook for the whole thing? Or just ((days borrowed/28) * 1.001 * principal)?
On the Nuo side of the spread, it was impossible to tell whether my reserve had actually been loaned out. I sat with $0.00 in gains for a couple of days. The loan dashboard shows a DAI price chart which… is sort of relevant, I guess. I’d at least like the option to see whatever factors the algorithm is taking into account to generate an interest rate displayed graphically.
So my takeaway from all this: directionally correct. Access to credit and the ability to provide it from one wallet is amazing. And the UI both of these platforms have provided are 100x easier to use than a bank. They’ve both stripped away almost all complexity. But I think they might be overshooting the mark there. Users who are thinking about this kind of thing and making decisions to borrow and lend want more information than either of these services currently provide. THAT SAID: it’s a great opportunity for developers (me, maybe?) to layer on analytics services as I would imagine both smart contracts are auditable. Sounds like a Lambda Labs project in the making.