An in depth exploration of the lending sector tracing its progression from traditional mechanisms to DeFi. Hatom is set to unlock substantial liquidity and drive the next major DeFi wave.
This research study provides a in-depth exploration of the lending sector, tracing its progression from traditional mechanisms to decentralized finance (DeFi) methodologies. It examines the transformation from early interest-bearing loans to current bank lending systems, alongside challenges such as financial crises and securitization. The focus then shifts to blockchain-enabled DeFi solutions, emphasizing their potential to disrupt the status quo through smart contracts and transparency. The paper focuses the analysis on the MultiversX blockchain and Hatom protocol's DeFi suite, including elements like liquid staking, lending/borrowing mechanisms, and stablecoins. It concludes with an assessment of Hatom’s potential impact on the future growth of DeFi on MultiversX, suggesting that Hatom could unlock substantial liquidity and instigate the next significant DeFi wave on this platform.
1.a Web2
1.a.1 A brief historical review towards their future drift
Although already mentioned in the Bible, the earliest known trace of interest-bearing loans comes from Mesopotamia and the Babylonian civilization, in 1750 BC, thanks to the Code of Hammurabi, which set in stone what came to be known as the first legal regulation of usury rates. These could not exceed 20% for financial loans, and up to 33% for seed loans.
Over its 3700-year history, interest-bearing monetary loans have oscillated between regulated and illegal practices, particularly during the Middle Ages under the Catholic Church, which defined them as contrary to charity. In the 12th century, the famous Italian theologian Thomas Aquinas wrote:
"To receive interest for the use of money lent is in itself unjust, for it is to charge for what does not exist [ ... ]."
While this prohibition evolved over the following centuries, remaining legal in commerce and industry, for example, when there was a share in the risks, in the reality of commercial and maritime business, monetary loans with interest were already masked by the complexity of financial arrangements and the multiplicity of currencies requiring exchange operations.
Although the practice became increasingly common and accepted over the centuries, it wasn't until 1830 that the Catholic Church lifted its condemnation, and in 1917 that the Vatican made it totally licit.
Historically, peer-to-peer lending and borrowing took place in the early days, before the banks took over the monopoly. Today, peer-to-peer borrowing remains very marginal, even if there are a few specialized sites, where the rate of bad debts and defaults remains much higher than in traditional finance.
If the advent of bank loans has helped to raise the global standard of living, they have become the norm in our consumerist societies, resulting in a standardization of lifestyles. Taking out a student loan so you can have a job to pay it off, then taking out a new loan to buy a roof over your head and a car to get to work. We live in a loop between loan and repayment on the expectation of our future earnings, judged and deliberated by the selfish financial interests (in the sense of Adam Smith's selfishness) of a system that seems sick.
At a time when our society is becoming more and more like a very good episode of Black Mirror, where mass surveillance is becoming ever more present and liberticidal, it's a good time to question the viability of loans via a system of centralized reputations, which tends either to push people into over-indebtedness, or to a phenomenal restriction of access to loans, brought about by central banks raising their key interest rates to combat inflation, potentially amplified by the unbridled quantitative easing they have applied over the last decade, although this injunction is not unanimously supported by economists.
1.a.2 The different types of loans in traditional finance
There are two main types of loan for private individuals in traditional finance: non backed reputational loans, and secured mortgage loans. For the first, it's your social status that enables you to borrow from the bank. The bank will analyze your family situation, the type and quality of your income, and whether you have a history of financial problems (e.g. rental payment defaults), in order to get a clear idea of the risks of non-repayment. It's confidence in our social contract structure that makes this type of financing possible. In the second case, the bank prefers not to trust you and requires collateral in order to grant you a loan. This can be either by mortgaging an asset, such as your property to obtain a consumer loan, or directly by taking out a mortgage, where you put the asset you wish to purchase with your loan as collateral. This enables the bank to seize the property you have collateralized, in the event that you are no longer able to repay your loan, so that it can be sold. These two types of loan can then be offered in a wide variety of forms, including fixed and variable interest rates, repayment terms and so on. But macroscopically, how does it work?
1.a.3 A Macroscopic View of the TradFi Lending and Borrowing Market
When you borrow money from a commercial/private bank, the bank is not lending you money from its own treasury, but creating new money! Contrary to popular belief, which would have us believe that customer deposits make loans possible, the opposite is actually true. Of course, this power to create money is not unlimited, but conditioned by the reserve requirements set by central banks. This is known as fractional banking. Private banks, through their ability to create money, can lend out more than their current reserves. In return, a percentage of the total amount lent by private banks must be deposited as mandatory reserves with the central bank. This rate is 1% in the Eurozone, 10% in the USA, and 20% in China. So, in theory, a European private bank can lend out 100 times more than it actually owns.
When you repay your loan at a rate set by your bank according to your profile and your potential monetary contribution (but which also depends on the key refinancing rates applied by central banks), the previously created money is destroyed, and the bank keeps only the profits linked to interest. This system is in place so that financing for individuals and small businesses is not limited to current bank reserves.
That's for loans and borrowings from private individuals, but for anything to do with companies, corporate and states, for very large loans, the latter can turn to the financial and bond markets where investment funds like BlackRock lend their customers' savings. The financial markets will break down corporate loans into smaller units, known as bonds, to make them liquid and tradable on the secondary market.
1.a.4 SubPrimes and Shadow Banking
Now that we've understood the basic theoretical principle, let's try to understand how this is managed in practice by the banks, notably through the securitization of customer debt. To do this, we'll need to introduce the notion of Shadow Banking.
"Shadows Banks" are actually hedge funds, pension funds and investment banks which, by buying securitized debt of bank clients, substitute for banks in risk management. In theory, they shouldn't be interested in this type of lending, since financing private individuals requires case-by-case analysis for amounts borrowed that are far too small for this type of institution to be able to place enough money.
By way of comparison, the largest hedge fund, BlackRock, manages no less than $9,500 billion in assets, while commercial banks manage only a few hundred million to a few billions.
This is where securitization comes in. This is a recent practice of investment banks, which allows them to buy loans from individuals and small businesses and securitize them in order to resell them on the financial markets. It was this practice that led to the Subprime crisis in 2008.
As private banks grant thousands of real estate mortgage loans, investment banks buy them in bulk and wrap them up in different tiers of financial securities according to various criteria of risk, repayment rate, etc., in order to standardize them. As volumes become much greater, and case-by-case analyses disappear, these securities can then be sold on the markets to other hedge funds, here Shadow Banks. These securities are called ABS, for Asset Backed Securities, being collateralized by the borrowers' real estate assets. Ultimately, although it is the private banks that grant loans via money printing, these are then sold directly to investment funds. This enables the banks to multiply their lending while relieving themselves and their investors of the associated risks. Long-term revenues from interest on loans are then transformed into short-term revenues through their repurchase by investment funds and resale on the financial markets through securitization.
This is where the problems come in. Normally, it's the banks' fear of default that forces them to lend only to safe, low-risk profiles, but by offloading this risk, the banks are lending in a chain, failing to meet their obligations, in order to maximize profits. During the Subprime crisis, this vicious circle led to loops of over-indebtedness among individuals, as banks lent to anyone and everyone, to the point of poisoning and distorting the various ABS tiers of risks.
When the market realized that all these securities were worthless because the ability of individuals to repay them was much lower than the total amount borrowed, the speculative bubble around these financial products burst.
In fact, this long process of securitizing debts via a long chain of intermediaries in order to transform long-term interest into short-term gain, enables finance to transfer the debt of citizens and companies onto the savings of other citizens and companies, forcing the central banks to come and save the banks in case of risks of bankruptcy, or else sink the whole social fabric.
The complexity associated with the non-transparency of the system, the potential conflicts of interest between banks and ABS rating agencies, with the excessive delegation and reallocation of risk all contributed to blind Wall Street of the critical state of financial markets and the collapse of the infamous Lehman Brothers bank.
1.b Web3
During this time of collapse, a famous anonymous entity by the name of Satoshi Nakamoto unveiled what was about to be the Big Bang of the new financial revolution, with the publication of the Bitcoin Whitepaper. If Bitcoin, originally conceived as a peer to peer electronic cash system, was not intended to become a technological support for a new finance, it was later thanks to Vitalik Buterin and the invention of Ethereum and its virtual machine that this would become possible, through Smart-Contracts.
Since then, we've seen most of the tools of traditional finance develop under the aegis of non-custodiality, decentralization and no intermediary other than the code itself. This began with traditional exchanges reinvented in decentralized exchanges like UniSwap, followed by Lending and Borrowing with protocols like Aave.
1.b.1 Backed Loan
For the time being, the Lending and Borrowing protocols are based on the principle of collateralized Loan. The advantage they offer is a total absence of intermediaries who could refuse to lend to you by providing a clear framework of rules thus avoiding any potential discrimination between individuals or entities wishing to benefit from its financial services. As long as you have collateral to offer, you are entitled to borrow a certain amount. In addition to bringing you returns from potential borrowers interest, this comes with a whole host of DeFi benefits, from hedging, to the possibility of taking short or long trades, making arbitrages, leverage your holding, etc.
In particular, mortgage loans are possible via NFTs. You are interested in an NFT but don't have the cash available at the moment? The protocol buys it for you, so a loan is opened, and you can get your NFT back on condition that you repay it with interest! It's a kind of deferred purchase without trusted intermediaries.
To a lesser extent, but one that is now expanding rapidly, notably with the tokenization of real estate, it is also possible to transfer bonds onto the blockchain. In RealT's example, for each property purchased with investor funds, a company called SPV will be created to hold the property. This company will then create a bond, representing its debt with interest to the investors. It is this bond that will be tokenized. So investors don't directly own a fraction of the property, but rather a share in the debt, interest and potential capital gains of the company holding the property.
We can analogize this financial structure as a kind of administrative and reglementary bridge between a debt contracted on the blockchain for the purchase of a real asset, and its repayment via the payment of rents or the capital gain realized by the resale of the asset.
In general, any kind of bond can be tokenized, and experiments in this direction have already taken place with Siemens, for example, which issued a $60 million bond on Polygon, but also thanks to start-ups like Obligate, which gives SMEs access to this kind of service, which is currently impossible on the financial markets, as the amounts of financing requested being too low to interest them.
1.b.1 Non-Backed Loan
While collateralized loans can be easily replicated in DeFi thanks to Smart-Contracts, non-collateralized loans are a different story. Because with no trusted intermediary or centralized authority, and because of the very concept of priority on the blockchain, no one would agree to lend their money without any compensation and assurance that pseudonymous borrowers would discharge their debts.
One proven solution is Flash Loans, loans that are repaid instantly. These allow loans to be taken out and repaid in the same transaction, and triggered only if the Smart-Contracts are sure that the various transactions will allow full repayment. They are used extensively in arbitrage operations to achieve rapid and sometimes substantial gains, without even having any capital.
On the other hand, we are beginning to see the arrival of non-collateralized loan solutions from verified institutions and companies. The latter can take out loans that are secured by Standby Letter Of Credit, third parties who undertake to pay out in the event of a borrower's bad debt. Users can therefore put their cash to work with peace of mind.
But that doesn't mean it's impossible from the point of view of private individuals: with SoulBoundToken, Zero Knowledge Proof and On-Chain KYC technologies, we could well see non-privacy invasive on-chain reputation systems develop in the future, but this will only be possible once the adoption of blockchain/crypto technologies and the utopia of DeSco, the decentralized society, has reached a more advanced stage.
Now that we've tried to define the current state of the traditional system, as well as the solutions emerging thanks to the new Blockchain technologies, let's take a step back to understand the trend, and the various improvements being made.
2.1 Web2 Problematic
When it's not going into a speculative frenzy, access to borrowing in Web2 remains deeply discriminatory in its operation, not necessarily out of desire, but above all to protect itself and keep risk management as healthy as possible.
Whether you're an individual in need of financing to buy a roof under your head, or a small business looking to expand its activities, when it's not rules that may seem unfair and open to interpretation that's closing the door on this type of financial service, it's sometimes simply because there's no solution today that meets your needs. This is particularly true of the emergence of participative financing, which fills the gap by providing financing from individuals to others.
Macroscopically, the current system suffers from such increased complexity, that its own players sometimes seem lost in it. With only limited visibility of the operations being carried out and the state of the system, risks come to be underestimated, and human psychology falls easily into greed, as is often shown in documentaries and testimonials recounting the events of the 2008 financial crisis.
Finally, the various conflicts of interest involved, as well as the delays often accumulated by regulators, add to the already explosive cocktail of the current financial system and prevent any realization before the house of cards is on the verge of an inevitable implosion. This is where central banks come in to play the role of firefighters, trying to prevent contamination of the rest of the economy by opening the liquidity tap to keep afloat the so-called systemic entities, whose bankruptcies would trigger uncontrollable chain reactions. Bailouts whose consequences are still poorly understood or even fantasized about, and which could play a major role in current inflationary trends and the long-term loss of value of our currencies.
2.2 How Web3 can fix this
Web3 is profoundly inclusive in the way it operates: no one judges who you are, what you've done in the past, and what you'd like to do in the future, in order to grant you financing. In its eyes, you're just a series of numbers, a pseudonym, an address. The famous "Code is Law" mantra defines a clear, algorithmic framework for the eligibility of the financial services it offers, while being self-managed by autonomous, decentralized organizations, where the decision-makers are first and foremost the users.
If Web3 doesn't calm our original sins of risk and greed, or even accentuate them, notably through its emergence, immaturity, its sometimes chaotic nature, and its current lack of appropriate regulations, its increased transparency and efficiency regarding data will give seasoned financial analysts a much clearer vision of the state of the system.
The complexity of financial arrangements is not in itself a problem (especially as Web3 could make them even more complex), as long as the transparent, public nature of the data enables in-depth, real-time analysis, by anyone who wants to.
While the UST/Terra Luna affair would seem to act as proof that Web3 is suffering from the same problems as its Web2 counterparts, many players were sounding the alarm long before its downfall, so it's more the immaturity of the sector that's to blame.
Thanks to technologies such as Zero Knowledges Proof and DAOs linked to appropriate regulation, Web3 will certainly reduce conflicts of interest between the various players, while enabling greater control of their activities.
Finally, the absence of any centralized authorities intervening to save entities potentially responsible for critical system states, allows for a healthier economic Darwinism. If Adam Smith's theory of the "invisible hand", for which the sum of the selfish wills of actors results in an overall action beneficial to the common good, would allow markets to self-regulate, it is also because of the existence of central authorities making rain and fair weather that it becomes false in practice. Capitalization of gains and mutualization of losses, in addition to being profoundly unjust and contrary to human rights, only survives because our system self-promotes the right to save malicious or incompetent actors, to the detriment of the group as a whole.
Web3 can not only make finance more efficient, it can also help us think about it differently. The improvements are not only technical, but also lead us to take a step back from our current political vision of the economy, and ultimately, review our entire societal model. True confidence comes from the absence of its necessity.
At launch Hatom Protocol will have 4 of its main modules live: Liquid Staking and Lending & Borrowing, Safety Module, and Staking Module.
Liquid staking
With liquid staking, staked EGLD can be used even if it is staked. Let’s see how it is possible.
For a better understanding let’s start with something familiar, providing liquidity on a Decentralized Exchange(DEX).
Let’s assume that 1 EGLD = 50 USDC.
A user has 1 EGLD and 50 USDC and provides liquidity on a DEX. The user sends his EGLD and USDC into a Smart Contract(SC) and in return, he gets another token (in this case $EGLDUSDC) as a receipt in his wallet. To get his initial tokens back, the user needs to provide the $EGLDUSDC LP back to the SC and the SC will return the corresponding tokens.
Using Hatom Liquid Staking, the stake of EGLD will work in a similar manner. When a user stakes his EGLD will receive a token sEGLD (Staked EGLD), that corresponds to the EGLD amount staked. To redeem the staked EGLD a user needs to provide the sEGLD tokens back to the SC. Think of sEGLD as a legal paper that proves you own EGLD.
It is called liquid because now the user can use his sEGLD tokens in any way he wants: to exchange them for something else, to buy NFTs, or in other DeFi protocols. The user does not have to wait 10 days for the unstake period to pass. Only the owner of sEGLD can redeem the staked EGLD. So if someone transfers his sEGLD to another wallet, he will be able to unstake his EGLD from the new wallet.
The value of sEGLD is strictly connected to the value of EGLD. sEGLD value will gradually increase over time because the staked EGLD accumulates interest and when unstaked, the user also needs to receive the accumulated reward.
This might seem complicated at first so let's clarify it even more by taking an example:
User A staked 10 EGLD on day 1 of Hatom Protocol and received 10 sEGLD. So at the beginning 1 EGLD = 1 sEGLD. Assuming an APR of 10% per year.
User B stacked his 10 EGLD in the usual way, by the end of the year he will have 11 EGLD(10 EGLD initially + 1 EGLD from accumulated rewards).
After a year, user A has 10 sEGLD, but he needs to get 11 EGLD back, which means that after a year the price of sEGLD increases and now 1.1 EGLD = 1 sEGLD or 1 EGLD = 0.9 sEGLD.
So if user C, after a year, stakes 10 EGLD in Hatom Protocol, will receive only 9 sEGLD because the price had changed due to interest and it is normal.
Liquid staking has some advantages:
- sEGLD can be used in liquidity pools, so sEGLD can be bought or sold directly bypassing the 10 days unstaking period.
- Automatic compounding increases the yearly rewards by reducing transaction fees and optimizing the compound period without any effort from the user.
- If urgent liquidity is needed for buying an NFT or a launchpad ticked, sEGLD can be used to buy it, and later can be bought back to redeem staked EGLD.
To achieve this Hatom partnered with a lot of staking providers and their SC will automatically stake EGLD to those providers based on the best APRs. Currently, there is no information about the fees collected by the protocol for staking.
Lending
Another important step in the DeFi evolution on MultiversX is the possibility to gain rewards by lending your tokens to other users. The rewards come from the users that pay interest to borrow those tokens.
To receive interest on assets, they need to be deposited in an SC and made available for others to borrow them. There is no minimum amount and no lock period, all assets can be withdrawn at any moment. The interest is not fixed and depends on the protocol’s usage(supply and demand for those assets).
EX: If the supply of EGLD is high the incentives for supplying EGLD will be close to 0 since no more EGLD is needed in the protocol, but if the supply of USDC is low, the protocol will increase the rewards for USDC deposits. These rates will be constantly changing so close monitoring is needed.
For advanced users, please check this link to discover the math behind the protocol: https://docs.hatom.com/getting-started/hatoms-ecosystem/lending-protocol/protocol-math
When tokens are deposited inside the lending protocol, the user receives back so-called HTokens depending on the asset deposited. For EGLD hEGLD is received, for MEX, hMEX, and so on. Think of these HTokens as a receipt provided to the token supplier. The receipt(HTokens) is needed to redeem the supplied tokens back.
As for the sEGLD explained above, the HTokens accumulate interest from the borrowers so their value increases over time.
Ex. User A deposits 10 EGLD in the lending protocol. He will receive 10 hEGLD. The APY for lending EGLD is 7% per year. After a year, he needs to withdraw 10.7 EGLD and he has 10 hEGLD so now 1.07 EGLD = 1 hEGLD or 1 EGLD = 0.93 hEGLD. The exchange value for hTokens will constantly be increased as the interest continues to accumulate.
The withdrawal of the assets takes place on the spot as long as enough assets are available inside the protocol. If there is not enough liquidity, the protocol automatically incentivizes the deposit of liquidity and discourages borrowing by increasing the borrowing interest. In this way, new liquidity is attracted by depositing or by paying back the loans so withdrawals should be always possible.
Borrowing
Borrowing is the operation of taking a loan inside the Hatom protocol. This is useful when a user needs liquidity for a short term, but does not want to sell his current assets.
Be careful, borrowing, if not done properly, can lead to a complete loss of your crypto assets, so it is important to understand the process.
Hatom uses an over-collateralized borrow mechanism. This means that a user needs to provide more value to the protocol (collateral) than the value he borrows.
EX: User A deposits 20 EGLD as collateral, the EGLD price is $50 and he wants to borrow USDC. His collateral value is 1000$. Let's say the maximum amount that can be borrowed (Collateral Factor) is 70%. The user can borrow a maximum of 700 USDC. The maximum amount that can be borrowed against the collateral depends on the type of collateral. Trusted tokens have a higher maximum value that can be borrowed.
The borrowed amount acquires interest with every second so if a user wants to repay his loan, he needs to repay the borrowed amount + interest. The loan can be paid only in the token that was borrowed. In the case of the previous example USDC. There is no time limit for repaying the loan.
So after a year at an interest rate of 7% per year, User A needs to repay 700+49 = 749 USDC.
The most important aspect when borrowing assets is the Health Factor or Liquidation Factor. This is the value of your Collateral Factor at which your position is liquidated(someone else can repay your loan and get your collateral).
Ex: Our User A has an active loan of 700 USDC and at the time of the loan his collateral was $1000 and a liquidation factor of 90%.
So if the EGLD price goes down to $38.8, the liquidation factor of 90% will be reached(38.8*20=777) and 50% of the user position will be liquidated. The percentages are just for example, there is no real percentage available yet.
How the liquidation works: A liquidator pays half of the loan(350 USDC) and gets $350 worth of the User A collateral +10% bonus(9 + 0.9 EGLD). After the liquidation User A remains with 10.1 EGLD as collateral and $350 as a loan to repay. At this point, User A cannot get back his initial 20 EGLD supplied, only a maximum of 10.1 EGLD. This is the reason anyone can lose his assets used as collateral.
To avoid liquidation there are 2 methods, increase the collateral or repay a part of the loan. To avoid liquidation in our example, User A could add 5 more EGLD, and at a price of $38.8 his Collateral Factor is 700/25*38.8 = 72% (less than 90%). Or the second option is to repay 100 USDC from his loan and his Collateral factor will be 600/777 = 77%.
Safety module
This is designed as a safeguard if anything goes wrong, to offer the users some buffer and assurance for the safety of their funds. Users are incentivized to deposit assets such as EGLD, sEGLD, BUSD, USDT, USDC, WETH, WBTC, UTK, and HTM and in return, they get HTM(the native token of the protocol). These tokens distributed as rewards are bought using the generated protocol fees.
Staking module
Users can stake their HTM tokens and get rewards from:
◉ Interest paid by borrowers and the proceeds from liquidations received in respective tokens
◉ A portion of the Staking service fee earned by the protocol, received in EGLD.
◉ A portion of the Streaming fee from leveraged liquid staking.
◉ A portion of the minting fee for USH
◉ A share of the Set-up fees and revenue from all isolated lending protocols.
The rewards are real yields generated by protocol usage.
Some use cases of lending and borrowing:
Making a profit when a token price drops(short).
Ex for EGLD:
Use 1000$ of any tokens(preferably a stablecoin) as collateral
Borrow $700 in EGLD at a price of $50/EGLD, that's 14 EGLD
Sell instantly 14 EGLD for 700 USDC
Wait for the EGLD price to go to $40
Buy 14 EGLD at $40 = 560 USDC
Repay 14 EGLD
Profit 700-560 = 140$
Making a profit when a token price goes up(long).
Ex for EGLD:
Use 1000$ of any tokens as collateral
Borrow $700 in USDC
Buy instantly 14 EGLD at $50/EGLD for 700 USDC Wait for the EGLD price to go to $60
Sell 14 EGLD at $60 = 840 USDC
Repay 700 USDC
Profit 840-700 = 140$
Leverage
Leverage is created when a user utilizes his borrowed amount to increase his collateral, borrow more and repeat.
In the long example above, instead of selling those 14 EGLD the user could supply them as collateral and thus increasing his collateral value from $1000 to $1700 and being able to borrow 1190%. This is an x2 leverage. If the process is repeated another time is x3 and so on. This is a very risky strategy because, in case of liquidation, the user might lose 3 times more than without using it.
In the near future, 2 more modules will be released, but we’ll talk more about them when the time comes, here is just a short overview:
Hatom USD
Overcolateralized Stablecoin that has a 1:1 peg to US Dollar and is backed by multiple crypto assets. USH can be minted and burned by the protocol. Usually, people tend to borrow stablecoins against the crypto assets so a decentralized way to mint a stablecoin automatically is useful so that the protocol does not rely on the supply of external stablecoins. This also reduces the borrow fees since there is no need to pay people to lend their stablecoins to the protocol.
Leverage liquid staking
This will be an automated way for EGLD stakes to increase their revenue using automated leverage. The protocol will mint xEGLD with will have 3.3x more rewards from staking with very low liquidation risk. This is possible by using the leverage mechanism explain above, meaning that protocol will use sEGLD to borrow more sEGLD and increase the user’s position in sEGLD thus receiving more rewards.
On the roadmap, there are a lot of new and exciting features, that will be available in the future, but there is no point in covering them right now, since any crypto project is subjected to a lot of changes from announcements to launch.
Explore the dynamic world of DeFi with this infographic illustrating strategies using Hatom Protocol. This guide offers insights into optimizing earnings, managing risks, and understanding the complexities of leveraging lending protocols in the expanding DeFi landscape from MultiversX.
MultiversX serves as a strong example of the dynamic, interconnected, and rapidly evolving world of Decentralized Finance. Its growth, implications for the DeFi landscape, and synergies with other protocols demonstrate the transformative potential of web3 technologies.
The Hatom token is set to play a crucial role in the MultiversX blockchain's DeFi ecosystem, bringing significant changes. It will be at the heart of the next DeFi wave happening on MultiversX.
When people have the Hatom token, they can control important DeFi components on MultiversX. They get to make important decisions on the various DeFi modules Hatom has worked on; lending, liquid staking, stablecoin modules are just 3 of the ones Hatom is working on.
5.1 HTM utility
Hatom’s HTM token will have different utilities around the project.
◉The main utility of the HTM will be in governance. All important decisions like listing new tokens, upgrades of protocol fees and rewards will be made using governance.
◉Users will be able to use their HTM as collateral to take out loans from an early stage, this creates possibilities of going long or short on HTM, creating volume and demand.
◉Receive protocol fees from all modules as follows:
-Interest paid by borrowers and the proceeds from liquidations
-A portion of the Staking service fee earned by the protocol
-A portion of the Streaming fee from leveraged liquid staking
-A portion of the minting fee for USHA share of the Set-up fees and revenue from all isolated lending protocols.
◉A portion of the protocol fees is used to buy back the tokens and distribute them in the Safety Module
For a decentralized protocol, that is ready to launch having “a portion” in all revenue streams, makes any investor thinks twice before investing. Nobody can make an investment strategy or a business plan using a portion because a portion is 5% or 0.1%. Even if all these could change by governance, having initial values is mandatory so an investor could calculate what volume it takes for the Hatom Protocol in order for the HTM token to generate the minimum rewards required by everyone's personal investment strategy.
The token is not required to use the protocol which is normal, so the only reason to hold the token is to decide its future and to share its profit, but the ways in which protocol makes profit are not public and clear. For a token with inflation of 157% in the first year and 107% in the second year, a portion is not enough, because the inflation is real and it takes a lot of demand to counter it
Lending & Borrowing
Lending and borrowing within the DeFi ecosystem rely on tokens with certain characteristics. For a token to be integrated into the lending protocol, it needs to have a relatively stable price, shouldn’t have big volatility, and sufficient trading volumes.
Once the HTM token satisfies these requirements and demonstrates the needed stability and liquidity, it will be seamlessly integrated into the lending protocol. As a result, users can utilize HTM in various ways. They can provide liquidity to the protocol by depositing HTM, use it as collateral to access loans, and also borrow against their HTM holdings.
Staking module
Hatom multiple DeFi modules will generate lot of volumes and revenue that will be redirected as dividends to the token holders that will stake on the staking module.
This will come at a later stage. A staking module will allow people to lock their tokens and keep a part of the protocol’s revenue.
Revenue will come from multiple products built by Hatom. Initially:
- Lending
- Liquid staking
And then:Leveraged liquid staking (xEGLD)
- Native stablecoin (USH)
- Isolated pools
- Universal lending
Safety module
Another part of the revenue will be redirected to the safety module, a DeFi components that will ask users to deposit tokens as a safeguard for unexpected protocol losses.
Users who participate in the safety module by depositing their tokens take on the responsibility of safeguarding the protocol. In return for assuming this risk, they will be rewarded with HTM funds sourced from the protocol fees.
The protocol's strong security measures make it unlikely that the safety module will be needed. However, it's still included as an extra security layer for emergencies, showing Hatom's commitment to keeping users' assets safe no matter the situation.
Governance
The HTM token will serve as a governance utility, granting token holders the power to influence and make decisions regarding all the DeFi modules within the Hatom protocol.
As token holders, users will have the right to vote on crucial matters related to the development, deployment, and improvement of various DeFi modules. This decentralized governance system ensures that the community's collective voice will play a pivotal role in shaping the future of the platform.
This paves the way for a democratic and community-driven DeFi decentralized protocol.
5.2 Economic implications
The success of Hatom is closely linked to that of MultiversX, and at the same time, given the importance of the components created by Hatom, the project is crucial to the success of the blockchain.
DeFi is one of the most important sectors in the crypto world, attracting capital from the world of traditional finance and giving the world a decentralised alternative. This has so far been immature on MultiversX, with primitives still absent and only now appearing one after the other.
Hatom will play a pivotal role in this major change taking place in MultiversX's DeFi, as it is the project that will bring lending first and create the first native stablecoin. It has also released the first major liquid staking module, which within a day of launch had 40 million in liquidity from its tight and active community of validators and investors.
The components it is building have proven their worth over the past few years, with liquid staking outperforming all other DeFi sectors and growing steadily, and lending also growing steadily. Both are seeing increasing adoption and are central DeFi components of any blockchain, that has finally arrived on MultiversX thanks to Hatom. Those components represent a big chunk of the total value locked of most chains, and Multivers is was missing them.
If TVL distribution percentages were to follow the same as the crypto market and maintain the numbers of the sectors already present (dex and farms) we would potentially have a TVL of more than USD 400 million, placing MultiversX in the top 10 in the crypto world.
5.3 Value proposition
Two elements are needed for a token to be successful, the success of the protocol and good tokenomics. His value proposition comes from his connection with the protocol together with brilliant and fair tokenomics.
Tokenomics
The launch of the HTM token follows a unique and transparent approach, distinguishing it from many other crypto projects on MultiversX. The primary objective is to ensure an honest and sustainable launch that aligns with the project's future success.
To further safeguard the launch process, HTM will initially debut on two centralized exchanges before making its way to a decentralized exchange. This move is designed to minimize the potential influence of bots, ensuring a more stable and genuine market response during the token's introduction.
By adopting this brave and investor-respectful approach, the project underscores its commitment to the long-term health and sustainability of the ecosystem. This launch strategy prioritizes transparency, equal opportunities, and stable growth, which are essential elements for attracting and retaining investors who share the vision of contributing to the project's success over the long haul.
You can view the tokenomics here:
https://docs.google.com/spreadsheets/d/1rc6j1iVe1bOJJaBxKEHJX7cZ-3xJ4HsXfcm0YI3WqR0/edit#gid=0
Protocol potential
Hatom fills very important market niches in the crypto world that were not previously present on the blockchain. Its good fortune is the fact that it is the first protocol to release several very profitable and necessary components such as liquid staking, lending and stablecoin on a third-generation blockchain like MultiversX. The HTM token serves as the central driving force behind the entire Hatom ecosystem, with its value and utility expected to grow over time. In its initial phase, the token will hold significant governance power, overseeing crucial DeFi components within the MultiversX blockchain. These components include the groundbreaking lending protocol, liquid staking solution, and the native stablecoin.
Drawing inspiration from the leading DeFi protocols on Ethereum, such as Aave, Lido, and MakerDAO, Hatom aims to encompass these essential pillars and more. For instance, Aave's governance token demonstrated impressive market capitalization, reaching 8 billion, highlighting the potential success of a well-designed protocol.
As the Hatom ecosystem matures and generates ample revenue, the plan is to deploy all the additional modules like the Staking & Safety Modules. The introduction of the Buy Back Module will provide an innovative approach to utilizing revenue. Instead of directly incentivizing money markets, the module will involve purchasing HTM tokens using the generated revenue and then distributing them as incentives within the lending protocol. This strategic move aims to bolster the token's value while supporting the overall project within the blockchain.
The token price will be a reflection of Hatom's significant value and impact within the blockchain. As the ecosystem thrives with multiple modules launched and revenue flowing in, the HTM token's prominence will rise, solidifying its position as a key player in the DeFi landscape of the MultiversX blockchain and beyond.
The immense potential and value proposition of the HTM token stems from its uniqueness as a project filling several critical gaps within the MultiversX ecosystem, fulfilling important niches that were previously missing. This distinctive approach sets HTM apart and positions it to thrive in the crypto market.
The substantial revenue it can generate within MultiversX becomes a vital resource to incentivize and support the protocol's growth. By utilizing a significant portion of this revenue to incentivize its money markets and reward token holders, the project ensures a sustainable and long-term healthy growth trajectory for the HTM token.
This strategy together with the token governance decision power not only creates an attractive proposition for investors but also cultivates a sense of ownership and commitment among token holders. The alignment of incentives and the promise of continuous rewards drive active participation and foster an ecosystem where everyone can benefits from the project's success.
As the Hatom protocol will continue to evolve and improve, it will solidify its position as a key pillar within the MultiversX blockchain, elevating the platform's overall functionality and appeal. The combination of unique features, successful revenue generation, and a sustainable growth model establishes HTM as a valuable asset with promising prospects for long-term success and impact within the DeFi space.
The advent of MultiversX within the DeFi space has significant implications for the industry. As a web3 tech solution, it's poised to reshape how users interact with digital assets, offering a platform for secured and efficient transactions. With an array of DeFi protocols interacting with MultiversX, the platform has developed an impressive network of synergies, enhancing liquidity, and fostering innovation.
6.1 MultiversX Implications
The advent of MultiversX within the DeFi space has significant implications for the industry. MultiversX's unique proposition is playing an important role in the expansion and evolution of DeFi. As a web3 tech solution, MultiversX can influence how users interact with digital assets, offering a platform for secured and efficient transactions.
The growth of MultiversX has been commendable, with an increasing number of users leveraging its platforms and tools for their financial needs, but not only. Its user-friendly interface, combined with robust security features, has positioned it as an attractive option for new and experienced users alike.
6.2 Synergies Between DeFi Protocols on MultiversX
DeFi protocols on MultiversX have become one of its key features. By establishing connections with different platforms, MultiversX forms an interconnected web of utilities, contributing to the overall fluidity and versatility of the DeFi ecosystem, especially when most of them are accessible through xPortal App Hub.
HatomProtocol: The integration of HatomProtocol's Lending and Borrowing tool with MultiversX, coupled with Liquid staking, will unleash a substantial quantity of liquidity within the ecosystem.
ProteoDeFi: ProteoDeFi uses xExchange's LP tokens for farming, enhancing MultiversX's liquidity. Additional features such as autostaking and NFT staking further augment the synergistic relationship between the two platforms.
JewelSwap: As a lending and borrowing token and NFT platform, JewelSwap contributes to the diverse functionality offered within the MultiversX ecosystem.
AutoScale: The AutoScale feature allows for the autorestaking of LP tokens and other farms, promoting efficiency and ease of use for participants.
Salsa: Similar to HatomProtocol, Salsa brings more Liquid Staking options, enhancing the liquidity of the ecosystem.
xExchange: With the infusion of Liquid staked tokens and borrowed funds from Hatom Protocol, xExchange is poised to see a surge in liquidity.
AshSwap: The inclusion of AshSwap, with its various LP farms which can be farmed for rewards, further enriches the DeFi offerings within MultiversX
Jexchange: As the first peer-to-peer DEX and aggregator, Jexchange is set to benefit from a boost in liquidity.
One Dex: The platform’s farms and limit orders will also receive an influx of liquidity, particularly from users hunting farms.
DX25: The impending launch of DX25 is expected to introduce novel features such as Price Range Liquidity, Simplified Liquidity, Margin, and Derivatives, further broadening the MultiversX ecosystem.
ESDT Market, VestaDEX, OferDEX, and CelestDeFi: These platforms will also receive a significant boost in liquidity from users farming APRs, enhancing the overall dynamism and profitability of the MultiversX network.
Conclusion
The in-depth analysis within this research paper elucidates the lending procedures of both traditional financial systems and the emergent decentralized finance (DeFi) sector. Crucial distinctions are drawn between the centralized, intermediary-reliant model of traditional finance and the decentralized, trustless protocols that are characteristic of DeFi, facilitated by blockchain technology.
Despite the strides traditional lending has made towards capital accessibility, it grapples with issues such as systemic risk, opacity, discrimination, and misaligned incentives. DeFi offers innovative solutions to these problems through its inherent composability, transparency, and disintermediation, albeit with persistent risks related to volatility and software vulnerabilities.
One of the focal points of the analysis is the MultiversX blockchain and the pivotal role of the Hatom protocol in spurring the next evolution of DeFi within this ecosystem. Through diversified offerings like lending, liquid staking, and stablecoins, Hatom is poised to unlock new liquidity avenues and significantly expand the DeFi potential of MultiversX.
The DeFi suite of Hatom is found to be effective in addressing the vital gaps in the MultiversX market, particularly in terms of overcollateralized lending and liquid staking of EGLD. These offerings are expected to have a substantial impact on Total Value Locked and user activity. The paper also scrutinizes the unique composability and synergies that Hatom shares with other MultiversX protocols.
Finally, the strong tokenomics and governance structure of HTM are examined, underlining their contribution to long-term sustainability and providing token holders with decision-making authority over the protocol's future. With Hatom focused to play an important role, the next major wave of DeFi growth on MultiversX is on the horizon. By filling important niches, Hatom substantially advances MultiversX's mission to foster the internet economy.
xFoudres
Ovidiu Arion
Andrei
xRobert
Davy Crypto
Astrarizon