New Opportunities for ERC4626 Token Holders
(Fringe's support for ERC4626 tokens is slated for Q3 2024 or earlier)
Introduction
Fringe DeFi lending and leveraged trading platform is excited to announce a new opportunity for holders of select ERC4626 tokens with our upcoming release Q2-Q3 2024. By listing these tokens on the Fringe platform, we enable holders to unlock the value of their assets and deploy them in various ways to maximize capital efficiency.
The market for ERC4626 tokens is substantial and growing. Our analysis shows that the top 100 ERC4626 tokens currently hold nearly $6 billion in total value locked (TVL). Interestingly, a meaningful percentage of this TVL is not being utilized in any further yield-generating strategies, either because no such options are available for certain ERC4626 tokens or because holders have chosen not to participate in existing opportunities. This untapped market is one that Fringe aims to serve.
Furthermore, we believe that even ERC4626 token holders who are currently deploying their ERC4626 assets elsewhere may find Fringe's offerings to be an attractive alternative. As such, the potential market for Fringe's ERC4626 integrations could exceed the currently untapped TVL. With the ERC4626 market expected to expand in the future, this represents a significant growth vector for Fringe of currently approximately half a billion dollars TVL.
ERC4626 tokens represent an important advancement in the DeFi ecosystem. By providing a standardized interface for yield-bearing vaults, ERC4626 enables greater composability, transparency, and ease-of-use. This makes it simpler for protocols like Fringe to integrate a wide variety of yield-generating assets and creates a more seamless user experience.
Selecting ERC4626 Tokens for Listing on Fringe
To determine which ERC4626 tokens to list on our platform, Fringe considers several key factors:
Holder Composition: We analyze the distribution of token holders, looking at the ratio and absolute value of tokens held by externally owned accounts (EOAs) and multisig wallets versus those held in other yield-generating contracts. Fringe prioritizes tokens with a high proportion of holdings that could potentially be deployed on our platform.
Underlying Token Utilization: We examine the utilization ratio of the underlying token, defined as the underlying balance divided by total assets. A proportion of the ERC4626’s underlying assets will be deployed to the ERC4626’s yield strategy. This gives us a sense of what proportion of the underlying tokens would be readily available in the event of liquidations on Fringe. A lower utilization ratio is preferable to ensure the stability and efficiency of our platform.
Redeemability: Some ERC4626 tokens may impose delays or restrictions on redeeming the underlying assets. Such tokens are not ideal for use on Fringe, as they could introduce inefficiencies into our liquidation mechanism and potentially lead to insolvent positions. We therefore focus on tokens with swift and reliable redeemability.
Composability Risks: If an ERC4626 token relies on a complex web of underlying protocols that cannot be readily assessed for security and stability, it may pose undue risk to Fringe and our users. We prioritize tokens with more transparent and reliable composition.
Use Cases for ERC4626 Token Holders on Fringe
Fringe offers ERC4626 token holders several ways to productively deploy their assets on our platform:
By lending your ERC4626 tokens to borrowers and margin traders, you can generate additional yield on your holdings. (See diagram below)
If you expect an ERC4626 token’s yield to be positive, Fringe allows you to express that opinion without being exposed to the price of the ERC4626 token’s underlying asset. i.e. isolate your exposure just to the ERC4626 token’s yield.
This can be achieved by using Margin Trade by going long the ERC4626 token and short the ERC4626 token’s underlying asset. Not only does this position allow you to isolate your exposure to just the ERC4626 token’s yield, it enables amplified exposure to this yield. (See diagram below)
Not only can Fringe provide isolated exposure to an ERC4626 token’s yield, it can also be used to profit when an ERC4626 token’s yield is negative, where shorting the yield exposure can be profitable.
This is achieved by taking out the opposite of the above position. i.e. use Margin Trade to open a position where the long asset is the ERC4626 token’s underlying asset and where the short asset is the ERC4626 token. (See diagram below)
ERC4626 tokens can be used as collateral to borrow any asset listed on Fringe. This allows you to short assets without leverage, or to borrow stables to deploy elsewhere in the DeFi ecosystem or cover short-term expenses. (See diagram below)
Fringe's Amplify facility enables ERC4626 token holders to gain additional leveraged exposure to their ERC4626 tokens. (See diagram below)
By depositing your ERC4626 tokens as margin, you can speculate on any of Fringe's listed assets using the Margin Trade facility.
Fringe’s Margin Trade facility also allows you to short ERC4626 tokens. (See diagram below)
Short or long the ERC4626 against its underlying, depending on whether its price is above or below the value of the underlying for which it is redeemable.
This scenario requires there to be liquid markets for the ERC4626 token. Though we’re unaware of any such existing ERC4626 dex markets, this is feasible in the future. Afterall, the yield-bearing wrapped staked Ether tokens are similar in nature to yield-bearing ERC4626 tokens (insofar that they both provide yield), and there are very healthy dex markets for wrapped staked Ether tokens.
This is where you have the opportunity on an external platform to earn rewards by staking an ERC4626 but where you only wish to enjoy the staking rewards and isolate other risks. These comprise the following strategies:
a. Hedge any risk of the ERC4626’s downside price potential, or
b. Hedge the underlying’s downside price potential, or
c. Hedge the ERC4626’s negative yield risk.
To do this for each of these cases,
a. If you wish to hedge your exposure to the ERC4626 price, borrow the ERC4626 then deposit it into the external staking program. (See diagram below)
b. If you wish to hedge your exposure to the underlying, borrow the underlying then use it to mint ERC4626 tokens then deposit the ERC4626 tokens into the external staking program. (See diagram below)
c. If you wish to hedge your exposure to the ERC4626’s native (potentially negative) yield, then use underlying collateral to borrow ERC4626 assets to then stake on the external staking program. (See diagram below)
Stay tuned for upcoming blog posts with step-by-step guides and video tutorials for each of these use cases.
Partnerships and Promotion
To maximize the potential of our ERC4626 integrations, Fringe is actively forming partnerships with ERC4626 token projects to highlight the opportunities our platform offers their users. We are also developing targeted incentive programs to encourage ERC4626 holders to participate on Fringe.
In addition, Fringe is proud to cooperate with the ERC4626 Alliance in support of the broader ERC4626 ecosystem. By collaborating with key players in this space, we aim to drive increased adoption and productive utilization of these powerful tokens.
Seamless User Experience
Handling ERC4626 tokens on a lending and margin trading platform has inherent complexities, including wrapping and unwrapping the ERC4626 tokens to and from the underlying asset when opening and closing leveraged trading facilities, when performing atomic repayments using collateral and when liquidating positions to ensure efficient liquidation operations to assure liquidator participation for platform stability. Fringe makes these operations seamless by automating all of these processes. Users are not required to undertake any of these operations themselves, therefore resulting in a seamless, intuitive user experience. It is innovations like this that position Fringe to provide the greatest utility to ERC4626 token holders and to maximize platform adoption.
Summary
Fringe's integration of select ERC4626 tokens represents a major opportunity for the DeFi ecosystem. By providing sophisticated holders of these tokens with new ways to deploy their assets for lending, borrowing, and leveraged trading, we aim to tap into the immense latent value in this space.
With hundreds of millions of ERC4626 TVL currently sitting idle, and the potential to attract tokens from elsewhere with our competitive offerings, Fringe is well-positioned to become a leading venue for productive ERC4626 utilization.
Our carefully designed token selection process, robust technical implementation, and strategic partnerships and promotional efforts lay the groundwork for a successful expansion into this exciting new domain. We look forward to serving the ERC4626 community and driving continued growth of this transformative token standard.
Fringe Finance - DeFi for everyone.
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