JimmyJ's pToken pawnshop and options marketplace

Another idea to boost Pickle’s TVL.

I propose to consider a pToken pawnshop which could be a building block for an options marketplace, based on forked audited Ruler code.

I really dislike “lending” protocols like AAVE/COMP. They take the worst from the worlds of true lending (bankruptcy risk) and pawnshops (overcollateralization). They slap on a fee and 2 middlemen (Chainlink and COMP DAO),

There are no pawnshops in DeFi currently, what a pity.

In a pawnshop, you could come to a pawnbroker show him your necklace (or a SPELL-ETH pToken). The pawnbroker decides it’s worth $10k and because your necklace (or a pToken) is volatile, he can give you $3k at 15% APY for 4 months. Or $8k at 100% APY for 4 months. Your choice.

Now the idea of a DeFi pawnshop improves on the real life idea. The pawnbroker can never swap your collateral for a fake and cannot go bust. Most importantly, there are no middlemen and no bankruptcy risk.
If the value of the necklace (pToken) goes down a lot, you don’t come back to collect it. After 4 months it belongs to the pawnbroker. Maybe after a 70% price drop your pawnbroker would want to buy it anyway?
If it retains value, you come back, repay the loan and everyone is happy.

I think this design is the easiest way to leverage up pTokens. Specifically it obviates the need for oracles and liquidations.
Leekuanjew has rightfully pointed out that Ruler protocol has similar code. It has failed due to being complex. What a great narrative to revive a dead project in a simplified way after it failed due to complexity.

so this is how Ruler works:
Bob deposits 1 wBTC into Ruler Protocol, Bob gets 10k rrTokens and 10k rcTokens.
He then sells 10k rcTokens for 9.5k Dai to Alice.
Bob uses the 9.5k Dai to do whatever he wishes with no risk of liquidation.
Before expiry, Bob pays 10k Dai + 10k rrTokens to Ruler and gets back 1 wBTC.

Alice buys 10k rcTokens from Bob for 9.5k Dai.
After expiry, Alice collect 10k Dai by transferring the 10k rcTokens to Ruler.

and this is how it could work:

Bob deposits 1 SPELL-ETH pToken into Ruler Protocol (let’s say worth $10k), Bob gets 10k rrTokens and 10k rcTokens and in the same transaction 10k rcTokens get sold for 3k Dai to Alice (agreed in an orderbook).
Bob uses the 3k Dai to do whatever he wishes with no risk of liquidation.
Before expiry, Bob pays 3.3k Dai + 10k rrTokens to Ruler and gets back 1 SPELL-ETH pToken. Or he doesn’t and he keeps the DAI.

Alice buys 10k rcTokens from Bob for 3k Dai.
After expiry, if Bob returned DAI, Alice collects 3.3k Dai by transferring the 10k rcTokens to Ruler. If Bob has kept DAI, Alice collects 1 SPELL-ETH pToken (most likely now worth below $3.3k).

No interface is provided to trade rrTokens or rcTokens (as opposed to Ruler design).

I think it’s important to use pawnshop branding, because everyone understands how it works. I think I have lost a lot of people when I have talked about the optionality of these contracts.

These contracts could be the building blocks for complete options marketplaces.
Each loan issuer is also writing a put.
Issue a 90% LTV loan on SPELL-ETH at 200% APY and you have an almost at the money put.
Issue a 30% LTV loan on SPELL-ETH at 15% APY and you have a deep out of the money put

I said a complete marketplace but you can only write and buy puts. Yes, but Deribit traders should be familiar with call-put parity. If you buy a put and long the same asset, you have created a synthetic call.

It would not be too complex to build a full options protocol on top of this block.

If it would be easy to strip off the Ruler token and fees, this has a tiny potential to become the most popular lending solution in DeFi.
I’ve heard every tardifi guy said Uniswap cannot possibly work. Yet it thrives because it has no counter-parties, oracles, fees, middlemen… It is perfectly suited for DeFi
A pawnshop could be your AAVE/COMP alternative where you can permissionlessly write puts on your favorite coin to flex about your conviction, or borrow against your SHIB at the top with no risk of liquidation.

2 Likes

some more thoughts about utility of the pawnshop and how a reverse-pawnshop could address lack of borrow markets for tail end assets:

I’ve been asked what would I like about DPI and it would be a market for long dated, liquid borrow for DPI, where I would be able to short it
Lightcrypto is asking around for $1m+ borrows on OHM and he can’t find it

Maybe instead of Pickle launching another stablecoin that nobody needs, which we can’t afford to bootstrap, and don’t want to bail out after an almost inevitable hack, we can address the market for lending tail end butique assets (like pTokens)?

You can short DPI on AAVE but the market size is small and the lending rates can unpredictably spike up
Lightcrypto can’t find a counterparty and a venue to short OHM

The original idea of the pawnshop is not really suitable for shorting. Building on raricapital idea or partnering with them or forking them could address that void in the market. We’re well positioned to address it, because we have our own assets that are hard to put a price on (pTokens).

I wonder whether a reverse pawnshop would be a good idea.

an OHMie brings 1m OHM to the pawshop, he agrees a borrow with lightcrypto, but instead of 1m in OHM, 1m in USD gets locked as collateral
OHMie transfers $1m to lightcrypto and atomically lightcrypto locks $1m in the pawnshop

lightcrypto has 2 options at the end of the 4 month period:
1 return exact amount of OHM and get back his 1m (after selling and rebuying)
2 do nothing, $1m goes to the OHMie

I love it when I’m talking to myself.

No need for the reverse pawnshop.

If the spec for the pawnshop allows any asset, the same code will let lightcrypto get several mil borrow on OHM

lightcrypto comes to an OHMie with a necklace (1m USDC), an ohmie decides to give him $1m in OHM
lightcrypto can decide to:
1 return the ohm to get his necklace (1m USDC) back after selling and rebuying (the likely option)
2 never come back, keep the OHM and let the ohmie have the USDC (unlikely)
the necklace reference is to keep the pawnshop reference logic, an OHMie can operate a pawnshop in which the currency is OHM instead of USDC