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CryptoEconomic Research

Abracadabra: Decentralized Stablecoins and Collateralized Lending in DeFi

Abracadabra is a decentralized lending platform in which users provide collateral in the form of specific interest-bearing tokens (ibTKN), namely yvWETH, yvYFI, yvUSDT, yvUSDC, xSUSHI.
by David ShuttleworthJanuary 11, 2022
defi protocol profile abracadabra

In return for providing collateral, users can borrow a proprietary stablecoin, magic internet money ($MIM), which can then be used to swap for any traditional stablecoin. In general, the formula for using Abracadabra is straightforward: collateral in, stablecoin out. Once the borrower returns the MIM back to the smart contract, the collateralized tokens are returned.

What’s wrong with the DeFi ecosytem today?

Throughout the DeFi ecosystem there are instances in which users stake or lend their assets with the

result being locked capital that they cannot use any further. A key example here is Yearn’s yVaults. A user, for instance, could deposit $USDT into a yVault and receive a proportional amount of $yvUSDT in return. However, while the user still owns the $USDT capital that is locked into the yVault, they cannot use it while it’s stored within the yVault. Instead, they simply hold the $yvUSDT until they choose to withdraw their $USDT deposit. In addition, they are charged different fees for maintenance and management while the asset is stored in the yVault, which reduces the total yield of their investment. With over $5B currently locked in yVaults this presents a tremendous opportunity to further optimize asset allocation within DeFi.

Abracadabra’s solution

Abracadabra allows users to access their locked capital by utilizing these assets as collateral to mint stablecoins (MIM). To do this, users deposit yvWETH, yvYFI, yvUSDT, yvUSDC, or xSUSHI (i.e. ibTKN) on Abracadabra, a debt allocation (with interest) is assigned, and then the user receives $MIM in return. $MIM is a USD pegged stable coin and is traded on markets with other stablecoins such as USDT, DAI, and USDC. Thus, MIM further extends the utility of otherwise locked capital. Users send the MIM back to Abracadabra and pay the interest on the debt allocation to release their collateralized assets. A key feature to note is that $MIM is backed by the ibTKNs used as collateral and thus the principal collateral value is constantly increasing.


Mechanism design and tokenomics

$SPELL is the protocol’s primary token and is for staking. Once staked, $SPELL token holders receive $sSPELL tokens in return as a reward. $sSPELL tokens used for governance and fee sharing (i.e. as a means for token holders to claim fees generated by the protocol).

Currently all protocol fees are derived from the interest collected from users borrowing MM and are distributed as follows:

Abracadabra Protocol

1. 75%: used to purchase $SPELL tokens that go to $sSPELL token holders

2. 20%: allocated to Abracadabra governance treasury

a. Main function of this treasury is to incentivize $MIM liquidity pools

3. 5%: allocated to Abracadabra multisig treasury

a. Main function of this treasury is market intervention.

Macro view

Abracadabra presents a very useful approach to extending the utility of otherwise locked, illiquid capital. The issuance of MIM as a stablecoin pegged to the USD and backed by ibTKN collateral does provide an added layer of stability. One initial concern is around the liquidity of MIM and its ability to realize and maintain a 1:1 peg with USD. Another concern is that it assumes a fixed rate between MIM and bkTKN. One area worth further exploration is in the event that the collateralized assets staked for MIM are liquidated. Other uses have the option to purchase this debt independently of the original debtor, but it remains to be see exactly what happens in the event of liquidation and no further claim.


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