Decentralised Finance has opened up the door for trustless smart contracts to replace shading banking practices, allowing anyone to lend and borrow in a permissionless environment.
The beauty of a DeFi protocol is that it doesn’t judge. Anyone can interact and partake no matter where they are based, whatever their net worth and (for better or worse) their financial history.
On top of that, there are no formal meetings with a lender, no ridiculous paperwork or invasive credit checks. When you’re using the blockchain it is near-instant, and depending on which chain you use, the fees can be cheap, the interest rates on your borrowing highly competitive. In some cases, it is completely free… more on this below.
Some of the earliest DeFi lending and borrowing protocols such as AAVE(ETHLend), Compound and MakerDAO revolutionised the industry and in my opinion, they were the first example of use-case in crypto.
It is kind of a gateway drug for non-crypto-folk, particularly for those with aTradFi background. It is simple to explain, you can see the value added by smart contracts, and because of this, these protocols continue to grow to this day with a huge amount of capital locked in them.
Seeing these protocols in action over the past few years does give me hope for the future. It removes the need for trust in an often shady borrowing/lending industry that can be exclusionary and even predatory at times.
The protocols are code and they don’t discriminate.
I was reading a WSJ article back in July that was titled Buy, Borrow, Die which confirmed what I had always thought to be the case. Wealthy individuals in low-interest-rate environments will borrow against their portfolios.
Why does this make sense? Well, for a few reasons.
- If you have a long term portfolio that has excellent dividends or growth potential why would you cash this in for an inflationary asset, in fiat?
- You don’t pay capital gains tax as you don’t create a taxable event as you haven’t sold.
- The rich (or their accountants) tend to understand how to properly utilise assets over fiat currencies.
- If the assets in their portfolio are outpacing the interest rate on the loan, then they’ve effectively been given free money.
This is probably the reason for Yellen recently saying she wants to tax unrealised gains. Yeah… good luck with that.
So, if you could keep hold of your crypto assets that, despite being volatile, are appreciating, all the while borrowing stablecoins against it to put to use, why wouldn’t you?
With the recent developments on the Avalanche blockchain, a project has emerged that is tying all this together extremely well with unnoticeable fees and completely interest-free borrowing…
So, without further ado, let’s take a deep dive into Teddy Cash.
What is Teddy Cash?
As you may have guessed, Teddy Cash is a decentralised borrowing protocol on the Avalanche blockchain. Teddy allows its users to deposit AVAX and borrow TSD, their own algorithmic soft-pegged stablecoin with a 0% interest rate. Yup, a big fat ZERO.
Teddy is a fork from the Liquity protocol which operates on Ethereum with over $2bn TVL.
Being on Avalanche the fees for transactions and interactions are minimal and extremely quick. The maximum TSD you can borrow against your AVAX deposit has a Minimum Collatteralisation Ratio (MCR) of 110%.
All this means is that for every $100 of TSD you want to borrow you will need to deposit a minimum of $110 worth of AVAX.
Users can take their TSD and use it as they please as it is tradeable on the most popular Avalanche DEXES like Trader Joe and Pangolin.
Alternatively, and potentially a better option, would be for users to deposit TSD into the Stability Pool which earns fees from liquidations and TEDDY kickbacks.
Teddy Cash also has another native token in TEDDY. TEDDY stakers earn fees from those who deposit AVAX into the protocol and also when those users eventually redeem their deposited AVAX. I’ll go into this more in detail below…
How TSD and TEDDY work.
TSD - Users receive TSD when they open what is known as a Trove. This is effectively just a contract in which you deposit your AVAX.
As I mentioned above the TSD stability pool is a place where TSD holders can deposit their TSD to earn rewards in the form of TEDDY.
Rewards are generated from liquidations and TEDDY emissions.
Liquidations can occur when a user AVAX deposit goes below the minimum collateralisation ratio of 110%.
So, if I had $110 worth of AVAX deposited and borrowed $100 worth of TSD and the price of AVAX dips, my AVAX/trove balance will fall below $110, and I may be at risk of liquidation.
This is to prevent under collateralization or, in simple terms, to stop the deposited amounts from becoming lower than the borrowed amounts.
When a liquidation happens a user’s AVAX is taken and distributed to all those in the TSD stability pool. The user still gets to keep the TSD although they will suffer a $ value loss.
If I borrowed $1000 worth of TSD for $1100 of AVAX and the value of the AVAX deposit dropped to $1050 and I was liquidated I effectively lose $50. This is because I am left with $1000 of TSD and no option to redeem my $1050 worth of AVAX.
It is worth pointing out that the stability pool would absorb the liquidation, so the earlier the liquidation the better it is for protocol users as a whole.
Anyone can liquidate a trove manually if it is below the 110% MCR. Why would they want to do this? Well, a 200 TSD bounty and 0.5% of the troves collateral are sent to the liquidator as a reward for doing so.
I don’t think they call it a bounty but I like the phrase and it works well.
The 200 TSD bounty comes from a liquidation reserve that is effectively a deposit a user pays once they open a trove. You can claim this back once you close a trove, but if you are liquidated then the liquidator receives this.
So, if your trove is liquidated then you also lose this 200 TSD deposit.
0.5% of the AVAX is also sent to the liquidator and the remaining is sent to the stability pool stakers.
Liquidations are expected to be carried out by bots in time but for now, manual liquidations can still be pulled off. So to increase the stability of the protocol you could liquidate those “risky troves”...
You can head to the Liquidate tab to actually see all the troves that are open and also check on their collateralisation ratio (CR).
Keeping a CR above 150% is recommended as in the event of what is known as Recovery Mode any troves above this 150% threshold are unable to be liquidated.
What happens if the total collateralisation ratio dips below 150%?
Recovery mode is a protocol stability feature that aims to maintain the total protocol CR of over 150%.
It does this by shutting off any further borrowers from opening troves, whilst also allowing those riskier troves below 150% CR to be liquidated. This way the riskier troves can be removed from the system and the average/total protocol CR can increase and stabilise.
It makes sense.n times of high volatility, if AVAX is going to dip in USD value then riskier troves pose a threat to the whole protocol. If more liquidations occur then the TSD stability pool has to absorb this and take on the AVAX as a consequence.
This decreases the TSD in the stability pool, further decreasing the protocol’s Total Collateralisation Ratio (TCR) to lower and lower levels, creating a cascade.
To prevent this in recovery mode the riskier troves can be flushed out of the system early to prevent a spiralling effect.
If a user has a TCR of 140% and the total protocol CR reaches 150% and recovery mode is initiated: For every $140 worth of AVAX deposited they could be liquidated and be stuck with $100 TSD.
The risk is then higher for this user and they can pay some of the debt back and increase their TCR to above 150% to avoid liquidation and this collectively increases the total protocol stability.
Game theory and DeFi all rolled into one.
The TSD peg -
TSD will fluctuate as it is algorithmically pegged to the dollar. Now, we all have Iron Finance PTSD so don’t run a mile when you hear algo-stablecoin.
As $1 worth of AVAX can be claimed against 1 TSD there are incentives to maintain the TSD price between $1-$1.10.
The $1.10 comes from the MCR of 110%. As a refresher, for every $100 of TSD, there is at least $110 worth of AVAX. Hence, if at any time a user wanted to redeem their AVAX with TSD they can do so.
If the price of TSD is at $1.10 then users are less incentivised to redeem their AVAX as they would receive $1 of AVAX for every TSD ($1.10).
If there is a lower incentive to redeem AVAX then the stability pool stays the same or increases and hence increases the supply of TSD, bringing it closer to the $1 level.
The same is true in reverse. In theory, if the price of TSD ever fell below the $1 peg, then users could buy it and redeem it for $1 worth of AVAX minus the redemption fees. This decreases the supply of TSD and consequently increases the price.
All of this is possible as the amount of AVAX will be at least 110% of the available TSD due to the MCR.
In short - Users are incentivised and disincentivised to maintain the peg through arbitrage opportunities.
TEDDY - TEDDY is the secondary token that earns rewards from all troves that are opened (AVAX deposits) and all troves that are closed (AVAX redemptions).
Each time a trove is opened a 0.5% fee is drawn from the borrowed TSD amount. So if someone borrows $1000 TSD then $5 of TSD will be paid to the Teddy staking pool. When someone redeems their AVAX there is another redemption fee to pay which is variable based on the number of redemptions.
The equation for the redemption fee is quite smart really and again is designed to maintain the stability of the protocol.
Quick math lesson (don’t worry it isn’t difficult) -
Redemption fee = (BaseRate + 0.5) * AVAX redeemed.
The base rate is set by the protocol and increases as more redemptions happen in a short period of time.
So, if lots of people begin to redeem their AVAX the base rate will move higher to disincentivise people to remove their AVAX from the protocol through redemption.
This base rate then decays over time so if there are fewer redemptions it will gradually return to its starting rate making it more preferable to redeem.
If all that went over your head there is a nice chart below.
TLDR: If redemptions go up then so do fees. This disincentivises redemptions and the base rate decreases.
Teddy’s Potential -
So if anyone was paying attention to Teddy Cash on Twitter this week they announced that there was a small issue with the amount of TEDDY that was set to be emitted to the TSD Stability Pool.
🚨 Error in Stability Pool (SP) Rewards. Funds are SAFU. 🚨
A variable that configures rewards emission was not updated correctly.- Only 32M total TEDDY rewards, not 50M- Remaining 18M token are out of circulation- APR on the UI was mostly correct— Teddy Cash 🔺 (@TeddyCashLive) September 30, 2021
So what does this mean? Well, initially there was supposed to be around 50,000,000 TEDDY released to Stability Providers in the TSD stability pool.
Due to an input error, there will now only be 32,000,000 TEDDY available as rewards to the stability providers… In effect, 18m TEDDY has been burnt...
So, after this realisation, the distribution and emissions now look like this:
Max supply of 82,000,000 TEDDY -
- 42.6% Community and early adopter rewards
- 39% for stability pool early adopter rewards. Distributed over 5 years.
- Year 1: 16,000,000 TEDDY
- Year 2: 8,000,000 TEDDY
- Year 3: 4,000,000 TEDDY
- Year 4 : 2,000,000 TEDDY
- Year 5: 1,000,000 TEDDY
- 3.6% for AVAX/TSD Pangolin LP rewards
- 3,000,000 TEDDY Distributed over the first 6 weeks
- 33% Treasury for partnerships, advisors, marketing and other rewards, e.g. additional LP rewards.
- 1M tokens were used for AVAX/TEDDY pool2 rewards.
- 24.4% Team. Locked for 1 year in a smart contract. Then 25% is granted by a multi-sig every quarter.
Now, it might have been a catalyst that saw a decrease in the TEDDY price, but I am confused as to why this would be…
I mean, it doesn’t take a genius to work out that the team have effectively just reduced the supply of TEDDY coming onto the market - all the while, displaying transparency and professionalism upon their mistake, if you can really call it that.
So each day in Year 1 there will be 68,493 TEDDY distributed to the stability providers staking their TSD at around 0.41% a day in interest.
This linear emissions schedule can be tracked here from documents provided by the team.
On top of the 68,493 TEDDY that is paid out to TSD stability pool providers, TSD-AVAX and TEDDY-AVAX LPs both collectively see around 107,143 TEDDY rewarded to the LPs of both pools.
So altogether, 175,636 TEDDY a day hits the wallets of those helping support the protocol in its early days.
But… if you are worried about a lot of supply-side pressure affecting the TEDDY price, I have good news for you. On the 7th of October liquidity mining rewards for AVAX-TSD and TEDDY-AVAX LPs will be ending, effectively reducing the TEDDY daily emissions by 61%.
Realistic Valuation -
Taking into account the troves, stability pool and the teddy staking pool, the protocol has around $112m and whilst TEDDY is currently at around $15m market cap or a 0.13 market cap/TVL ratio.
The TVL is growing rapidly with around $30m being added in the last 72 hours.
Another day, another giant leap for Teddy! We've now crossed 100 million in TVL on our protocol! This Teddy is hungryyy. We're truly humbled. Thank you all for the love, trust, and support!❤🐻Things gonna get real cozy. #Avalanche #AvalancheRush #$Teddy #Tsd #Clicktogetcozy pic.twitter.com/mtrqA1gMUn
— Teddy Cash 🔺 (@TeddyCashLive) October 3, 2021
I never know how to really take the whole market cap to TVL ratio but for a $15m market cap project to have nearly 10x that in TVL which is growing rapidly tells me that the TEDDY token is undervalued as it is in its current state.
DeFi Llama is one of my favourite places to go for a quick snapshot of what is going on in the multichain world.
According to their Avalanche avalanche metrics tab, TEDDY is now in the top 5 projects by TVL. It has taken them a couple of weeks to reach this great achievement and judging by its neighbours in this list and their current market cap’s they still have a lot of room to grow, in my opinion.
More value to be added to TEDDY?
I wrote the next section the day before the TeddyDAO announcement and couldn’t be happier to see additional utility being added to TEDDY and additional community input into the protocol.
Before Teddy DAO announcement -
“Despite the Teddy Cash team stating a few times in their docs that TEDDY is not a governance token, it wouldn’t be insane to think that this could be implemented going forward…
$TEDDY will fix the imbalance in tokenomics by moving TEDDYs from the team allocation to the *treasury* and let the *community decide* on how to spend them. Details on the governance of the treasury coming soon. Get READY! 🧸❤️ pic.twitter.com/VbQZe2kDiz
— Teddy Cash 🔺 (@TeddyCashLive) October 1, 2021
Additional governance utility would be excellent for demand pressure on the TEDDY token.
I’d personally like to see the TEDDY from the treasury put into the TEDDY staking pool to earn TSD which could be used to buy TEDDY from the market and distribute it further to the TEDDY staking pool.
Now, take that with a pinch of salt because I am literally an ‘idiot.”
So, following this announcement, I am highly optimistic about the longevity of Teddy. Not just because of this but the way they described the potential use case for governance.
DAOs are the next movement in crypto and we have a lot to learn when we all eventually enter into DAO-Summer, but projects setting their stalls out to anticipate and partake in this inevitability will capture a ridiculous amount of upside.
Users who hold Teddy being able to vote on the direction of the projects is one thing, being able to vote on how treasury funds are allocated is a whole different ball game. Imagine Teddy holders becoming the majority LPs in some of the biggest pools on Avalanche using the Teddy treasury to increase revenue for the protocol and its holders even more?
What about using the funds to incubate and launch other projects in the ecosystem that would benefit the teddy protocol itself? All of these ideas are just a pipedream for now, but I like that the team have even brought up the possibility.
Oh and what about the Avalanche Rush Incentive program? Well, judging by the way that multiple other projects on the Avalanche network are being given funds towards this program, this isn’t out of the realms of possibility either. All I’d say is keep an eye out for any future announcements regarding this…
Despite it being very early days - with Teddy being only 1 month old - they have shown some impressive growth. TEDDYs price action was like nothing I have seen in a long time and it signalled to me that people are crying out for emerging projects on the Avalanche network.
I think that governance for TEDDY would be a great addition. In practice, I am sure the team can speak to this better than I can but having the additional utility for the token would be great for demand and reduced sell-side pressure from those who are receiving TEDDY rewards from the stability pool.
Why? Well, if you have a few million dollars worth of AVAX in a trove, it might be wise to keep hold of that TEDDY if that was your ticket to governance voting rights on the platform.
Plus, the better the price action on TEDDY the more troves will be opened in my opinion. Who wouldn’t want to take an interest-free loan on AVAX, one of the highest potential assets in the whole game, to borrow TSD and earn TEDDY as a reward!
It is a win-win-win (yes 3x wins). If the team and the market can get this right the TVL in the protocol will be ridiculous. We have already seen 2 projects on Avalanche hit the $1bn TVL milestone, and with the current inflows to the chain plus Avalanche rush incentives and more chain adoption, there’s a massive opportunity for new and emerging projects to flourish.
I don’t want to dwell on this too much as the project is 1 month old and has accomplished A LOT in such a short space of time.
The team has been excellent with my stupid requests for info and images for this article and this is again a big positive in my book. Recently, they also announced two new advisory roles with an excellent track record of building with projects like Yearn and Snowball, another great Avalanche project. All in all, it seems like they have their shit together.
I think the future is very bright for the protocol and its users and investors. I’ll be keeping a very close eye on how these guys progress and supporting it as much as I can along the way.
TLDR: Teddy is undervalued.
Popsicle Finance article pending…
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