Introducing Increment Earn
- Use cases, Risks, and Guidances
Increment Earn is a smart-contract-based, algorithmically-set interest rate, and decentralized money market for mainstream tokens on Flow blockchain. Since its launch on the mainnet 3 weeks ago, 160 suppliers and 50 borrowers have already used the protocol.
Seeing community members have uncertainties about the product, we’ve compiled this article to give more explanations of the use cases, risks, as well as a user guidance.
Use Cases:
Put it simple, the money market protocol is like a smart contract bank on Flow. Unlike fractional reserve banks in the real world, the money market is fully-collateralized (actually over-collateralized) with collateralFactor and liquidation mechanisms to make sure the smart contract bank is always solvent.
What can you do with a bank then?
1. Deposit to earn interests:
As of publishing time, Flow suppliers are earning an apr of 5.99% — the interest accrues in real time, on a per-block basis, and supplied Flow tokens are withdraw-able at any time.
Some might ask if staking to a node gives an apr of 8%, why would one supply into the money market? Well, consider below reasons:
* Dynamic interest rate
The rates are purely determined by the demand and supply of the asset, and the interest rate algorithm is coded into the smart contract. As the Interest Rate Model of Flow denoted:
After the critical utilization point (which is 80%), the borrow rate and corresponding supply rate become much more sensitive to the util% change — so as to encourage borrowers to repay back and suppliers to deposit to earn more interest.
With current interest rate model, the maximum supply apr of Flow could be as high as 64% in extreme conditions if there’s a big demand of borrowing Flow.
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* Time has value, so as instant liquidity
Just like you won’t put all your money into fixed rate saving account although its yield is higher, instead, you would always keep some cash — Staked Flow tokens are locked and illiquid for at least 2 epochs (14 days), during which time you cannot withdraw early even when you really need urgent cash. However, Increment Earn suppliers can withdraw from the money market at will, as long as there’s enough liquidity in the pool.
Time to make your leisure flow tokens work for you!
* Deposits grant the ability to borrow
Like a bank, deposited tokens can be used as collateral to borrow any other tokens in the market. Each asset comes with a collateral factor which is always smaller than 1.0 — this ensures the money market is always over-collateralized and stays solvent whatever the underlying asset price changes. If you ask why you want to borrow from the money market, check below.
2. Take necessary cash without selling
It’s really painful for hodlers to sell too early, it’s more painful when the sold tokens skyrocketed a few months after selling. But one does need some cash to pay for rent and food — with Increment Earn it enables hodlers to get USDC without selling, by supplying Flow as collaterals, send to Coinbase (Circle) and then redeem into fiat currency.
Some might ask if one needs $ 100 why not just sell $ 100 worth of Flow, well, as explained earlier that time has value and all is about timing: if Flow price goes back 30 you only need to sell 3.3 Flow to pay back the loan instead of selling 78 Flow right now. It is not coming without any risk though, doing this is actually implicitly longing Flow (see below).
3. Leverage-long a token to build a position
Say I’m a Flow long-term believer and I want to accumulate more flow, but I’ve already used all of my cash, what to do now? With Increment Earn you can do this:
1. Supply Flow as collateral => 2. Borrow USDC => 3. Swap USDC to Flow => 4. Supply more Flow => 5. rinse and repeat.
As Flow token currently has a collateral factor of 0.66, in theory you can acquire and supply 2.94x of your original Flow position. Of course this comes with a liquidation risk that if Flow price drops below a certain level then your supplied position will be liquidated. But anyway it gives you the option to leverage-long a token.
4. Short-sell a token to take profit
Say in a bear market, I think Flow token would drop further, is there a way to earn some profit out of this prediction? With Increment Earn you can do so:
1. Supply USDC (stables) as collateral => 2. Borrow Flow => 3. Swap for USDC => 4. Supply USDC back to make your position safer => 5. Wait Flow price to drop further and then buy back => 6. Repay borrowed Flow and take some happy profit.
Of course there’s a liquidation risk if Flow price pumps above a certain level so you should always be careful if you have any borrowed position.
5. Three alphas I won’t share anywhere else 🤫
* Lockin Coinlist-sale profits
Coinlist-sale participants can be greatly benefited from Increment Earn to lockin their Flow profits today, if they anticipate Flow price will drop further in the bear market:
1. Supply USDC as collateral => 2. Borrow Flow => 3. Sell now => 4. Waiting for Coinlist monthly unlock => 5. Pay back borrowed Flow
Noting that this is actually implicitly shorting Flow, so still DYOR and be aware of the underlying risks before taking any action.
* Earn $MyToken without holding Flow
Mynft has introduced staking rewards to award $MyToken to Flow token holders who stake with them, estimated apr right now is 20%. Now with Increment Earn you can receive free $MyToken even if you don’t currently hold any Flow tokens. The step is similar:
1. Supply USDC as collateral => 2. Borrow Flow => 3. Stake with Mynft => 4. Earn free $MyToken & Pay back borrowed Flow at any time
With rewarded $MyToken you can support platform creators and earn further through its voting mechanism.
* Participate a launchpad with no BLT exposure
People love launchpad projects as they give retails a chance to invest with the same valuation as institutions, so it usually comes with a guaranteed profit for participants. But a common requirement is that one has to hold the the launchpad’s platform token to be eligible, and the allocation weight is proportional to the number of launchpad tokens one hold.
Now with Increment Earn people can supply Flow or stables and borrow BLT token to participate a launchpad sale, magic!
Risks
With great benefit comes great risk. This article is not financial advice and you should always do your own research. Here lists some risks you need to evaluate before being involved with any money market product:
1. Liquidation risk
As long as you have debt (borrows) to the platform, you may be explosed to liquidation risk as the token price fluctuates. Check documentation here to understand more about the liquidation mechanism and corresponding market parameters. Liquidators may be profitable as the money market grows, they also serve as safety guardians to keep the whole system healthy and solvent.
2. Oracle / Price feed risk
Price feed is usually the weakest and attackable component within any DeFi protocol. If it feeds wrong price data then all borrowers may be suffered to liquidations. There have already been countless oracle attacks happened before, so you should evaluate the oracle used by the money market and be aware of its risk.
We’ve built the 1st decentralized price feed natively on Flow, with a frontend demonstrating current feed status here. It combines the strengths of both decentralization and practicability: It’s composed of multiple whitelisted nodes, each node independently fetches price data from major exchanges for the specific token, aggregating based on an exchange weight. Medianizer smart contracts aggregate and pick the median from price data reported by the nodes.
The oracle smart contracts are audited, with all 5 whitelisted nodes are currently running by us (Increment Labs Team), there’s a plan to add more price sources, more nodes, as well as inviting other teams / projects to run oracle nodes, but not for now. We believe that starting with a professional team to evaluate and manage risks in the beginning is necessary, while at the same time staying transparent, to reach progressive decentralization is the safest and best strategy. If you feel unsafe or uncomfortable to this, you’d better not use the money market product.
3. Smart contract risk
The bank is running 7x24 on-chain with business logic coded in complex smart contracts. Any flaw may lead to exploits by hackers and thus loss of funds. Although we’re quite confident of its security level, as all the smart contracts have undergone three rounds of auditing, including:
- Increment Team’s internal auditing
- Audited by Dapper Labs before the permissionless deployment
- Audited by a third party professional security firm Oak Security
Users should still be aware of the potential smart contract risk and do not put in the money that cannot afford to lose. The whole article is not financial advise and you’re always encouraged to do your own research and do not touch anything you don’t understand.
User Guidances
1. Connect Wallet
The first step is to connect the app with a wallet to use the money market. In this guidance we’ll go ahead with BloctoWallet. It also supports to connect with LilicoWallet.
BloctoWallet requires your email to sign in/register, a one time passcode will be sent to your email. If you’re a frequent Blocto user, it might also automatically connect.
2.1. Supply (Deposit)
Choose the token market (currently FLOW, FUSD, USDC & BLT are available) you want to deposit into, clicking ‘Supply’ button and then approve the transaction:
2.2. Borrow
Supplied funds can be used as collaterals to borrow other fungible tokens. Let’s take the FLOW token as an example:
Click ‘Safe Max’ to automatically fill in the borrow Amount so that only 60% of the maximum borrow limit is used. You can manually edit that value, but just keeping in mind that the higher the percentage of borrow limit is used, the closer to liquidation the account is.
Once borrowed, the page status will change and show your position status, net apr and the supply/borrow balance.
In this example the repay button is greyed out because the user has no borrow position that needs to be repaid.
2.3. Repay
Lower the borrow limit percentage by repaying back borrowed amount plus interest. Click ‘Repay’ button and switch to the ‘Repay’ card to perform the transaction:
2.4. Redeem (Withdraw)
Withdraw the supplied assets as well as generated yields by clicking ‘Redeem’ button and switch to the ‘Redeem’ card:
Still, the ‘Safe Max’ label is to protect the account from liquidation and automatically fill in the redeemed amount, which can be manually modified.
3. Understand Market Data
The ‘/Markets’ page exposes global statistics like total TVL, number of suppliers and borrowers, as well as per-market data like market liquidity, supply APR and borrow APR, etc.:
Further market parameters such as InterestRateModel, Collateral Factor, etc. can be viewed by clicking into the asset list:
Final notes
Again this article is not financial advice and you should always do your own research. The benefits of embracing Decentralized Finance is obvious though: you have full control of your assets and wallet keys, and it’s all about transparency as everything is on-chain, ruled and custodied by smart contracts.
About IncrementFi:
One-stop DeFi platform to boost liquidity & yield opportunities on Flow blockchain.
App: https://app.increment.fi
Twitter: https://twitter.com/incrementfi
Discord: https://discord.gg/increment
