The DAO Baker Series. Chapter 6: Swap Market, Yield Baker & Baker Refills
This article represents an additional article to the existing five-part DAO Baker series covering the additional aspects including Swap Market, Yield Baker and Baker Refills.
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Swap market is an Automated liquidity provision, built on Tezos. It will provide liquidity for DeFi applications that utilize dXTZ, sXTZ, and SLOT tokens.
“A boat load of Stable coin supply will be there to trade between SLOT tokens and dXTZ use cases.” – Matt Shams, The CEO and Project Lead at BlockSwap
Swap Market is a basis layer DAO BAker DeFi: other applications can be built on, or connected with Swap Market.
Yield Baker is one of such applications that can make use of Swap Market. Yield Baker provides a pool for a lending platform on Swap Market. People can add dXTZ to the pool, and earn interest from people who borrow dXTZ.
Initially, it will only be possible to borrow dXTZ against SLOT tokens. So, only SLOT token holders will be able to borrow dXTZ through Yield Baker.
But as soon as Swap Market goes live, any dApp developer can start out a lending platform on Swap Market for different purposes.
Yield Baker won’t have counter-party risk, since your dXTZ is borrowed against a token with the same underlying value. Both dXTZ and SLOT tokens are backed by XTZ.
So, since the borrowed amount is matched by collateral with the same underlying value, you are guaranteed to get your value back, no matter if the borrower succeeds to make a profit with the borrowed funds or not.
The Yield Baker annual profit can add up to 25%
- dXTZ holders provide liquidity
- dXTZ holders can earn 0.21% per cycle (4096 blocks)
- On average 3 days per cycle (Remember block timing is not consistent it can go up down a little)
- 0.21 x 120 = 25.2%
- The yield is capped at 25%. If the remaining 0.2% is earned, then it will be stored in the smart contract for margin to make sure users can withdraw at any time. There is no admin key. This means that, if any XTZ is surplus due to the fact that there is a yield over 25%, then that dXTZ is locked in Yield Baker forever.
Yields are paid in dXTZ
All yields on Yield Baker are denominated in XTZ as the base unit of account, payouts are made in dXTZ as default. However, a user can decide to convert to a SLOT, or a Stable coin through Swap Market.
DAO Baker Refills
DAO Baker Refills is another decentralized smart contract, which gives bakers that are over delegated the opportunity to fill their baker up and prevent over delegation.
Over delegation happens if a baker has too much XTZ delegated to him, and he does not have enough XTZ to put up as a bond to create enough rolls. 1 full Roll is 8,000 XTZ.
A roll consists of 800 XTZ fixed by the baker as a bond, and the rest can be delegated to him. All XTZ that is delegated over the amount of 8,000 XTZ, is over delegated XTZ if the baker does not have enough XTZ to put up as a bond for the next roll.
If a baker is close to over delegation and can use some extra XTZ to put up as a bond, they can borrow the sXTZ through DAO Baker Refills.
To participate and supply liquidity, you supply XTZ to the DAO Baker Refill smart contract. This means that you do not use your XTZ that is already part of the DAO Baker ecosystem. You supply undelegated XTZ, not dXTZ or sXTZ.
The smart contract delegates the XTZ and mints sXTZ, which will be added to a pool. Bakers can borrow that sXTZ to fill a new roll.
Instead of earning interest per time period, you will receive 50% of the SLOT tokens that are minted due to your contribution.
Since the DAO Baker team estimated that the price of SLOT tokens as the derivative token will exceed the price of XTZ, this could be an interesting option for lenders, however we will have to see how it pans out in reality.
The upside could be higher than what one could earn in Yield Baker. However, in Yield Baker you can earn from day 1, per cycle, while in DAO Baker Refills you’ll have to hope the tokens you make available, will be used by a borrower and will be filled in a full roll.
After that, the minted SLOT tokens that you earned, will only be spendable after 32 cycles after it was minted (one full Tezos governance period).
But when the delegation level drops and the roll size lowers under the threshold, the SLOT token will be reduced again to an sXTZ token and you do not earn any SLOT tokens.
So, while the returns could be higher, there also is a risk that you earn nothing extra. This means that your XTZ and your staking rewards remain as they would be without participating in DAO Baker Refills.
In other words, the risk is that you do not earn SLOT tokens, but you still own and hold your XTZ and you never stopped earning staking rewards.
The reason for bakers to choose DAO Baker Refills instead of Yield Baker, is the fact they do not need to pay interest on the borrowed sXTZ.
They do lose out on the upside potential of the 50% SLOT tokens though. Small bakers could tend to go for DAO Baker Refills since they have less capital and make less revenue through baking.
So, their financial scope could be smaller and they could not afford the interest rates that they would need to pay for Yield Baker.
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