1️⃣,0️⃣0️⃣0️⃣,0️⃣0️⃣0️⃣% APY — this is what happens when Microfinance & Leverage meet DeFi
Finance people like to say that there are 8 miracles in the world: seven ancient wonders and the compound interest 😎.
If you did not watch this funny 40-second futurama TV series, it fully illustrates the power of compound interest: a protagonist, delivery boy, and iconic beacon of mediocrity Phillip Fry once put 93 cents into his bank savings account at 2.25% annual rate. Then he was accidentally cryogenically frozen ⛄ for a thousand years 😂. See in the video how much 💰 he ended up with.
Hourly Interest Rate vs. APY
In DeFi we always talk about APY — Annual Percentage Yield. However, while the APY you see on your bank’s account gives you a good idea about future profits, APYs you find on liquidity mining websites just do not make any sense: they might vary from 130% to 5000% to 20% — it’s impossible to rely on those numbers if you want to forecast your actual returns.
In W😮Wswap we like simplicity and precise math. Therefore, we took a new approach and introduced Hourly Interest Rate (HIR). Our target users — degens who want to buy promising 🔥🤞🚀 tokens with 5X leverage — do not care too much about the cost of capital, because they won’t keep their long positions for too long: maybe a few days, or even hours if the market is 🔝🔝🔝. For example, if HIR = 0.1%, a trader who borrows capital just for 1 day will end up paying “only” (1+0.01)²⁴-1 = 2.43%
Paying 2.43% interest for 1 day might seem like a lot, but if the token you bought grows 20% on the same day, with 5X leverage you will make 90% net profit (after repaying the loan with interest). For example: let’s assume you have $100, you borrow $400 and buy a token for $500. After a 20% price surge you will have $600. However, you need to pay back $400*1.0243 = $410 to the liquidity pool, so you left with $600-$410 = $190. Your net return for this trade will be ($190-$100)/$100 = 90%.
Now, let’s see the system from the perspective of liquidity providers: if many traders frequently borrow and return capital to the liquidity pool, 0.1% HIR would be equivalent to 6️⃣1️⃣9️⃣,4️⃣8️⃣5️⃣% APY, which is absolutely🤯. This is what we call W😮W returns for liquidity providers❗❗❗
Of course, the actual “realized” APY will be lower, because we did not take into account the average utilization rate of the pool and it can’t be always 💯%. For example, if the pool’s utilization rate is 50%, it means that only half of the pool’s capital is generating compounding profits, which then will be divided by the total pool’s size to calculate the realized APY.
Microfinance in DeFi.
W😮W protocol will disrupt the DeFi industry with a totally new use-case, which has many similarities with microfinance from traditional finance: creditors lend money to risk taking Chads but charge high interest rates in return.
The 600,000% APY we mentioned before is not the limit: if there are people who want to borrow capital for 1 day, say, at 4%, the APY will be much much higher — 100,000,000%. The table below shows how even a small change in HIR affects daily and annual returns.
You might wonder, is it even legal or fair to charge this kind of interest rates? We think that the best idea is to let the market decide — the rates will be automatically determined by supply and demand of the liquidity pool.
We need to understand that there are is no “free lunch” in finance (apart from portfolio diversification, of course 😁): high returns always come with high risk — if potentially loss-making positions are not liquidated properly, liquidity providers can loose their capital too. To address this problem the protocol has 3 lines of defense, such as an insurance fund, an efficient decentralized liquidation mechanism and a decentralized governance.
While we discussed the insurance and liquidation mechanisms in our previous posts, here is a summary of W😮W governance mechanism.
W😮W governance summary
👉WOW protocol will be managed by a decentralized community of WOW token-holders and their delegates, who propose and vote on adding/removing tokens for leveraged trading.
👉Proposals are executable code, not “suggestions” for a team to implement. If a proposal passes, a new token will be automatically added for trading.
👉People can receive and delegate their voting rights. So, a delegate can vote without actually having WOW token.
👉Anyone who has 10,000 WOW votes will be able to suggest adding a new token for trading.
👉Delegates can vote for 3 days, and if the proposal gets at least 50,000 votes and the majority votes YES, then a Timelock kicks in.
👉After 24 hours of queuing in the Timelock, the proposal is broadcasted to the network.
The interface for adding proposals and voting will be provided on our website after the v1 is launched.
If you want to get in touch or contribute to W😮W protocol, join our telegram community.
Have a W😮W day!
Your W😮W team
