Introduction
Meet Blue, an avid investor who has recently become interested in synthetic assets. Blue believes that decentralization and the blockchain are powerful tools for the modern trader. Blue has learned about the Indigo Protocol and wants to mint synthetic assets using it instead of the highly-centralized, expensive brokerage accounts he currently uses for equity investing.
Violet is a retail day trader located in Nigeria who regularly trades on cryptocurrency exchanges.
Why use Indigo?
Both Blue and Violet have cost saving and accessibility incentives to use the Indigo Protocol. Blue is incentivized by the low cost to mint synthetic assets and the availability of decentralized exchange platforms he may use to trade or supply his tokens as a liquidity provider (LP) to earn trading fees from other users. Violet is incentivized to trade on Indigo since she can hold and trade all of her assets on a single platform with virtually no downtime.
Uninterrupted trading
Blue has been trading on traditional centralized exchanges for several years, ranging from Binance, Coinbase, eToro, Robinhood, and others. During times of high market volatility where retail traders have triggered a ‘short squeeze’ on large market manipulators in over-leveraged positions, centralized exchanges have been known to halt trading without reason and effectively shutting trading down for the exchange participant. Decentralized platforms like Indigo solve this problem with permissionless and censorship-resistant smart contracts. Ultimately smart contract-enabled markets for minting and trading assets have native uptime guarantees being run on public blockchains which results in users completely safeguarded from uptime interruption.
Borderless Participation
Historically it has been a difficult process for Violet to participate in exchanges outside of West Africa due to the limitations of the traditional finance KYC steps that create exclusive market participants from select nations. Indigo mitigates this barrier by allowing Violet or anyone else in the world access to assets for borderless participation. Violet now has the ability to mint (or buy on a DEX) synthetic shares of supported assets at any time from any location around the world.
How to use Indigo?
Violet wants to short iBTC
Violet thinks that Bitcoin (BTC) is overvalued at a current price of, let’s say, $625 per coin, and is going to drop in price. Violet currently has $13,000 USD-pegged Stablecoins in her Cardano wallet that she can use to borrow some iBTC.
Violet’s Wallet Balance
Violet knows that she can mint 10 shares of iBTC from the Indigo Protocol by providing USD Stablecoin as collateral. Violet uses her USD Stablecoin and provides Indigo Protocol with 200% collateral to mint 10 iBTC.
Violet’s iBTC CDP
As a result of providing collateral and opening the iBTC Collateral Debt Position (CDP), Violet successfully mints 10 iBTC tokens which are sent to her wallet.
Violet’s Wallet Balance
Violet knows that she can simply get her collateral back by taking the newly minted iBTC tokens to a DEX and selling them for USD Stablecoin. Violet sells 10 iBTC for $625 each on a Cardano DEX.
Violet’s Wallet Balance
Violet’s assumption was right, the iBTC stock price has depreciated to $500 per share. Using her technical analysis, Violet realizes this is the time to buy back into iBTC. Violet buys 10 iBTC from a DEX at a share price of $500.
Violet’s Wallet Balance
Violet can now repay her iBTC debt to Indigo Protocol. By paying 10 iBTC from her wallet to the iBTC CDP to repay her debt, closing her debt position and receiving her collateral as a refund.
Violet’s Wallet Balance
As you can see by Violet’s final wallet balance, she has profited a total of $1,750 USD Stablecoin by shorting her borrowed iBTC.
What are the risks?
The risks of short selling based on the example above is losing the collateral provided to the Indigo Protocol when their CDP is in a position to be liquidated (CDPs lower than the minimum collateral ratio are subject to liquidation). In Violet’s example she would lose her $12,500 in collateral. However, since she sold the iBTC at $625 each, she has $6,250 from selling the minted iBTC. This means that Violet could lose a maximum of $6,250 if the price rose to a point that her collateral ratio was below the minimum collateral ratio and the iBTC CDP was liquidated.
This is significantly safer than traditional shorting, since the maximum you can lose is the collateral you provided to the protocol (in the extreme event the price of the asset was to go to $0).
Why go short?
Violet has decided to go short because of speculation that the price will go down. Speculators often use short selling to capitalize on a potential decline in a specific security or across the market as a whole. Short selling provides an additional opportunity to make profits in a declining or neutral market.
Blue wants to long iBTC
Using his technical analysis, Blue believes that the price of Bitcoin is going to rise. Blue is ready to bet $3,000 that the price of BTC will go up.
Blue’s Wallet Balance
At its current price of $600, Blue purchases 5 iBTC from a DEX for a total of $3,000.
Blue’s Wallet Balance
Let’s say the price of iBTC rises to $725 per share. Blue finds this as an opportune time to sell his iBTC holdings. Blue sells 5 iBTC at $725 per share, totaling $3,625.
Blue’s Final Wallet Balance
As you can see in the “Blue’s Final Wallet Balance” table, Blue profits a total of $625 USD Stablecoin.
What are the risks?
The risks of going long are very similar to the risks involved with going long in traditional exchanges. If the price of the asset depreciates, so does the user’s position. However, as you’ll learn in the “Blue wants to earn rewards on his iBTC holdings,” Blue can earn interest on his iBTC position whenever a user’s CDP is liquidated, which will naturally happen as the price of the asset appreciates.
Why go long?
In this example, Blue believes that the price of Bitcoin (BTC) is going to go up. With an expectation that the asset will appreciate in value in the long run, Blue overall makes a profit. It is most investors’ beliefs that the coin will rise over the long term. This notional has been pretty backed up by historical data shown by the graph below [4].
Blue wants to earn rewards on his iBTC holdings
Blue is interested in providing stability to the Indigo Protocol as well as earning rewards on his iBTC holdings. By pooling his iBTC holdings to a stability pool, Blue can earn approx 110% by helping liquidate defaulted CDPs.
For example, imagine that Blue has 25 iBTC held in his wallet that he wants to provide to the iBTC Stability Pool.
Blue’s Wallet Balance
Blue interacts with Indigo Protocol by providing his iBTC to the Stability Pool.
Blue’s Stability Pool Balance
Blue’s Wallet Balance
After some period of time, a user’s CDP is liquidated. As a part of the liquidation process, Blue’s stability pool holdings are used to pay off that user’s debt. However, as a reward for paying off that user’s debt, Blue receives an equal share of collateral, equivalent to 110% of the value of the iBTC holdings. In this example, let’s say the price of an iBTC at time of liquidation is $500, and Blue provided 2 iBTC to assist in the liquidation.
Blue’s Stability Pool Balance
Blue withdraws his USD Stablecoin Rewards from the stability pool to his wallet.
Blue’s Stability Pool Balance
Blue’s Wallet Balance
Blue then reinvests his USD Stablecoin for iBTC at a trade price of $500 per share.
Blue’s Wallet Balance
Finally, Blue provides his iBTC back to the Stability Pool so that he can provide more liquidity to the protocol and earn more rewards.
Blue’s Stability Pool Balance
As you can see in this example, Blue has provided stability to the Indigo Protocol and essentially earned .2 iBTC (~$100) as a reward.
What are the risks?
In this case, Blue most likely was long on his iBTC position and knew that providing stability to the protocol he could earn additional iBTC. Essentially earning interest on his holdings. The largest risk for Blue in this case is that his speculation on the price of iBTC rising over the long-term is wrong and the price of iBTC goes to $0.
Why stake in a stability pool?
The underlying reason Blue wants to stake his iBTC in a stability pool is to earn approx 110% rewards on his iBTC position. In addition to earning rewards on his iBTC, Blue is also earning rewards in the form of the $INDY token.
[1] https://www.valuepenguin.com/average-cost-online-brokerage-trading
[2] https://iohk.io/en/blog/posts/2021/06/10/stablefees-and-the-decentralized-reserve-system/
[3] https://www.clym.io/robinhood-and-the-ccpa-selling-your-personal-data-to-the-rich/
[4] https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-
