Phase III of the Mero launch is commencing! Actions are now live for all LPs. Actions enable DeFi users to make their liquidity reactive by adding layers of utility to their Mero LP tokens. In this blog we’ll go over what Mero’s reactive liquidity brings to DeFi, Action launch details, and a review of how Mero pools have performed over the past 9 months.
Bringing reactive liquidity to DeFi
Liquidity in DeFi today is static. Meaning, users must allocate their funds to serving a single utility (e.g. yield-farming, collateral, AMM liquidity providing). When users allocate their funds to just a singe utility they realize the opportunity cost of not having their funds deployed elsewhere.
Mero’s reactive liquidity solves this problem by enabling users to allocate their funds to serving multiple utilities. Specifically, liquidity on Mero can automatically shift between different positions depending on what is most efficient (as defined by the user). What if instead of choosing between posting more collateral or farming more yield, you could do both at once?
Phase III: Actions
Any user who holds Mero LP tokens can register them to an Action. Actions enable LPs to make their liquidity reactive to market conditions by setting personalized market triggers. For example, liquidity registered for top-ups by a Mero LP can automatically shift between Mero pools (where it earns yield) or their collateral (where it secures their loan).
Mero’s first Action, collateral top-ups is now live on mainnet! A collateral top-up is the act of depositing additional collateral to secure the health of a loan. Increasing collateral in this manner allows users to reduce the risk of getting liquidated and autonomously maintain the health of their debt. Top-ups are currently supported for Aave and Compound loans. Liquidity that is registered for top-ups continues to earn yield from Mero strategies up until the very moment user-defined conditions are met. At which point, liquidity is autonomously delegated from Mero pools to the user’s collateral.
Each Action on Mero (including top-ups) generates a platform fee which is paid for by the user and distributed among protocol stakeholders (LPs and Keepers). Meaning, LPs who do not register Actions can earn yield in excess of strategy performance. Users who have registered an Action can close their position at anytime by unregistering their LP tokens.
Mero keepers are off-chain bots that monitor registered positions and collect fees for executing Actions. An open source keeper implementation can be found on the Mero GitHub. Anyone can become a Mero keeper by running the team provided implementation or by creating their own.
Why borrowers should use Mero top-ups
Currently there is roughly $1.7 billion in collateralized ETH on popular borrowing and lending protocols. Of which, less than 2% is within 20% of its liquidation price. This means that almost all users borrowing against ETH in DeFi are utilizing significantly less leverage, or borrowing power, than they could be. In other words, borrowers are using excess collateral (i.e. posting more collateral than needed) as their primary method of debt management or liquidation protection. Furthermore, this method of posting excess collateral allows borrowers to manage their debt passively in a highly volatile market that trades 24/7.
Fair enough right? We all love our precious ETH and most of us probably feel queasy at the thought of losing it due to being over-leveraged. However, while posting excess collateral is an effective way of avoiding liquidation it often times comes at a big cost. A critical element of investing is opportunity cost. That is, every time you take a new position you lose the potential gains of having your funds allocated elsewhere. Borrowers who utilize over-collateralized loans especially realize this as posting more collateral comes with more of a realized opportunity cost.
By posting excess collateral borrowers can borrow more without increasing leverage (i.e. liquidation risk). For example, if a borrower has:
- Collateral: 10,000 USDC
- Borrows: 6,000 USDC
They are borrowing at a 0.6 LTV or they are leveraging 60% of their collateral. If the borrower increases their collateral and debt to:
- Collateral: 12,000
- Borrows: 7,200 USDC
They have increased their debt without increasing their leverage. The opposite would be true if their collateral stayed constant (10,000 USDC) but their debt increased. This is the dilemma that borrowers are left with. Either increase collateral and realize more opportunity cost, or increase leverage and realize more risk.
But what if you could increase your leverage without increasing your risk?
Interest-bearing collateral top-ups
Mero LPs who register collateral top-ups are effectively turning their Mero liquidity into backup collateral. Ready to be added as primary collateral for their loan the moment it is needed. This has several advantages for borrowers. One being is that with Mero top-ups registered, borrowers can borrow more without having to increase collateral or leverage. For example, let’s assume a user has the following loan on Aave:
- Collateral: 6,000 USDC
- Debt: 3,000 USDC
- LTV: 50%
Now let’s assume the user borrows more but also uses his Mero LP tokens to register collateral top-ups.
- Collateral: 6,000 USDC
- Debt: 3,500 USDC
- LTV: 58.33%
At first glance it appears that the user has increased leverage, and therefore risk, but since there is now a Mero top-up position, which is functionally backup collateral, we can adjust the loan’s unrealized LTV
- Mero top-up position: 1,000 USDC
- Collateral: 6,000 USDC
- Total collateral: 7,000 USDC
- Debt: 3,500 USDC
- LTV: 50%
While the actual collateral of the loan is never increased, registering top-ups enables users to realize greater leverage without increasing their potential liquidation risk. Instead of posting excess collateral that sits idle, users can deploy their funds more efficiently by utilizing backup collateral or collateral top-ups.
Furthermore, there is a specific case to be made for using Mero top-ups when it comes to earning yield. Where backup collateral on Mero is deployed to farm yield through Curve and Convex which consistently earns far greater yields than lending rates on popular money market protocols.
Mero strategy performance
Currently, top-ups can only be registered with Mero LP tokens. Mero’s core yield product (i.e. Pools) have been live on mainnet for close to 9 months now. Since inception, Mero pools have had over 1,460 unique depositors and have maintained an average base APY of 7.8%-11.5% for stablecoins. Additionally, Mero pools have performed exceedingly well relative to competing projects. When sorted by base APY on DeFi Llama, Mero pools consistently rank within the top 10! At the time of this writing, both meroDAI and meroUSDT hold the number two rank.
How to compare Mero yields to other projects:
- Go to https://defillama.com/yields
- Search for the pool token you want to analyze (e.g. USDC, DAI, ETH)
- Filter by chain and select Ethereum
- Filter by attribute and select Single Exposure
- Sort by Base APY
Mero’s reactive liquidity connects the most powerful DeFi legos to enable any user to start using DeFi like a pro. A key part of our vision is not only to make allocating liquidity more efficient, but to make DeFi a better user experience. The Mero community, through their feedback, suggestions, ideas, and memes play a critical role in guiding the growth and development of reactive liquidity.
If you’re interested in learning more, have questions, or want to explore some of the juicy strategies that Mero top-ups enable, join us on Discord!
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