{"id":158307,"date":"2021-01-20T01:20:37","date_gmt":"2021-01-19T22:20:37","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/projects-weigh-security-risks-benefits-of-liquidity-pool-token-collateral\/"},"modified":"2021-01-20T01:20:37","modified_gmt":"2021-01-19T22:20:37","slug":"projects-weigh-security-risks-benefits-of-liquidity-pool-token-collateral","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/projects-weigh-security-risks-benefits-of-liquidity-pool-token-collateral\/","title":{"rendered":"# Projects weigh security risks, benefits of liquidity pool token collateral"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a259970c07cb\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a259970c07cb\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/projects-weigh-security-risks-benefits-of-liquidity-pool-token-collateral\/#Another_step_in_the_cycle\" >Another step in the cycle<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/projects-weigh-security-risks-benefits-of-liquidity-pool-token-collateral\/#Extra_risks\" >Extra risks<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/buradabiliyorum.com\/en\/projects-weigh-security-risks-benefits-of-liquidity-pool-token-collateral\/#More_liquidity_more_security\" >More liquidity, more security<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong># Projects weigh security risks, benefits of liquidity pool token collateral <\/strong>&#8221;<br \/>\n<img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDEvNWVjYzUzNjItYWUyOC00ZmRkLTk2ODAtZjdkMmQ5ZGE0NzVkLmpwZw==.jpg\" \/><\/p>\n<div class=\"post-content\" data-v-5a136f3a>Multiple decentralized finance (DeFi) projects are moving forward with plans to allow liquidity provider tokens as collateral for stablecoin and lending services \u2014 though experts caution that the security considerations associated with using LP tokens in this manner can be complex.\u00a0<\/p>\n<p>LP tokens are distributed to liquidity providers on automated market makers (AMMs) to represent a provider\u2019s stake in a liquidity pool. Providers are incentivized with trading and protocol fees that are paid out upon withdrawal. <\/p>\n<p>While they\u2019re often the last stop in a cycle of yield farming transactions, multiple DeFi platforms are now considering using them as collateral, including MakerDAO, Aave, and BadgerDAO \u2014 a move that would \u201ckeep the cycle going\u201d for yield farmers, according to BadgerDAO\u2019s Chris Spadafora. <\/p>\n<h3><span class=\"ez-toc-section\" id=\"Another_step_in_the_cycle\"><\/span>Another step in the cycle<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>\u201cWhen groups like us are able to say, \u201cOh, you can unlock this illiquid position, and borrow against it so you can go and take additional strategies [&#8230;] that&#8217;s where it gets interesting,\u201d he said in an interview with Cointelegraph last week.\u00a0<\/p>\n<p>BadgerDAO is planning to release a stablecoin \u2014 current community speculation is that it will be named CLAWS \u2014 that liquidity providers will be able to claim against their LP collateral. <\/p>\n<p>The potential benefits of unlocking this liquidity are significant \u2014 and not just for individual traders. Jordan Gustave, the COO at lending platform Aave says that it could expand the ecosystem and inflate figures like DeFi\u2019s closely-watched total value locked (TVL).<\/p>\n<p>\u201cThe DeFi TVL could grow as much as people are willing to lend out to LP tokens collateral users, meaning that if I have enough liquidity to use my ETH\/WBTC as collateral, then one could go easily 3x long on the LP token and use the additional liquidity to farm UNI \/ Sushi \/ [Balancer],\u201d he said. <\/p>\n<h3><span class=\"ez-toc-section\" id=\"Extra_risks\"><\/span>Extra risks<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>However, according to Tarun Chitra, founder and CEO of DeFi risk analysis firm Gauntlet.Network, using LP tokens as collateral prompts specific considerations depositors and platform designers need to keep in mind.\u00a0<\/p>\n<p>\u201cIt makes sense when the lender controls one of the assets (e.g. Maker allowing leverage on ETH\/DAI LP shares), as the leverage ratio is transparently known the lender. It does also make sense when you want to make more complex derivatives, but you have to be much more careful.\u201d<\/p>\n<p>Chitra explained a worst-case scenario in which LP tokens could lead to cascading, deflationary liquidations across the DeFi ecosystem. In this case, \u201cLP token debt defaults, LP tokens are liquidated, lowering liquidity in some pair, making direct liquidations more expensive\u201d in a continuing cycle. <\/p>\n<p>Spadafora and Gustave also both warned of additional risks surrounding oracle attacks, a topic that Aave explored <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/medium.com\/aave\/the-uniswap-market-is-live-on-aave-protocol-12b5a4cc5e2\">in-depth<\/a> when they chose to allow Uniswap v1 collateral, going so far as to develop a unique price discovery mechanism that values the underlying assets in the liquidity pool in Ether. <\/p>\n<p>\u201cNot all LP tokens are suitable (as collateral), the same way not all tokens are suitable. You just need to <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>ly twice as much diligence as there is essentially two tokens to review in the process,\u201d said Gustave. <\/p>\n<p>Gustave added that an Aave community member, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/governance.aave.com\/t\/arc-implement-a-uni-v2-liquidity-pool-token-market-initial-discussion\/645\">zer0dot<\/a>, has accumulated enough proposition power in governance to push forward a Uniswap market that will support v2 tokens as collateral on Aave. <\/p>\n<p>As with MakerDAO and Badger, the Aave proposals appear to be tremendously popular and will likely move to implementation shortly. <\/p>\n<h3><span class=\"ez-toc-section\" id=\"More_liquidity_more_security\"><\/span>More liquidity, more security<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Despite the additional layers of smart contract risk and accompanying security concerns, Spadafora thinks they can ultimately be managed with proper due diligence and community faith.\u00a0<\/p>\n<p>\u201cYes it does increase risk but again it comes down to the platform. Longer tenor, security posture and reputation matter the most,\u201d he said. <\/p>\n<p>Meanwhile Chitra, who has researched the economics of liquidity provision extensively, urges caution and says that the rush of projects using LP tokens as collateral can be worrying.<\/p>\n<p>\u201cA lot of protocols seem to implement it haphazardly and that&#8217;s nerve-wracking. Maker is the only place that seems to be diligent about their LP share borrowing.\u201d<\/p>\n<p><template data-name=\"subscription_form\" data-type=\"defi_newsletter\"><\/template><\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. Follow us on\u00a0<span style=\"color: #ff0000;\"><a style=\"color: #ff0000;\" href=\"https:\/\/news.google.com\/publications\/CAAqBwgKMLG0nwswvr63Aw\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Google News<\/a><\/span>\u00a0too, click on the star and choose us from your favorites.<\/span><\/strong><\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\">For forums sites go to <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/forum.buradabiliyorum.com\/\" target=\"_blank\" rel=\"noopener\">Forum.BuradaBiliyorum.Com<\/a><\/span><\/strong>\n<\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\"><strong>If you want to read more <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/news\/\" data-internallinksmanager029f6b8e52c=\"2\" title=\"News\" target=\"_blank\" rel=\"noopener\">News<\/a> articles, you can visit our <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/en.buradabiliyorum.com\/general\/\" target=\"_blank\" rel=\"noopener\">General category.<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<p><span style=\"color: black;\"><a style=\"color: #ff9900;\" href=\"https:\/\/cointelegraph.com\/news\/projects-weigh-security-risks-benefits-of-liquidity-pool-token-collateral\" target=\"_blank\" rel=\"noopener\">Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;# Projects weigh security risks, benefits of liquidity pool token collateral &#8221; Multiple decentralized finance (DeFi) projects are moving forward with plans to allow liquidity provider tokens as collateral for stablecoin and lending services \u2014 though experts caution that the security considerations associated with using LP tokens in this manner can be complex.\u00a0 LP tokens&#8230;<\/p>\n","protected":false},"author":1,"featured_media":158308,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/images\/1200_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDEvNWVjYzUzNjItYWUyOC00ZmRkLTk2ODAtZjdkMmQ5ZGE0NzVkLmpwZw==.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[74891,77595,90109,72287],"class_list":["post-158307","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-ethereum","tag-lending","tag-peer-to-peer-lending","tag-security"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/158307","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=158307"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/158307\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/158308"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=158307"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=158307"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=158307"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}