How to use the EOSDT stablecoin to make a leveraged long investment in EOS

By EOSDeFi1 | EOSDEFI | 23 Oct 2019

$3.09 tipped


If you’ve been wondering about how to access and leverage your EOS holdings, then you should know I’ve recently discovered a new way to do it. You can implement a leveraged long position in EOS using the Equilibrium framework to borrow EOSDT —  a stablecoin that should maintain a value of $1 USD  — by creating an Equilibrium position.

The basic idea is that we can deposit EOS collateral into Equilibrium’s smart contracts, generate EOSDT, then use that EOSDT to buy more EOS. If the USD value of our EOS increases in the future, then our gains are leveraged — we get to keep some of the EOS we purchased after selling enough to repay the EOSDT.

So let’s break it down step-by-step with a hypothetical example. (It isn’t exactly hypothetical — since I did it myself to figure out how it works!)

The Equilibrium framework

To start, let’s take a closer look at the numbers that we find on Equilbrium’s website.

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  • Rate  is the current price of EOS, written in USD. It can be seen on the eosdtorclize contract in the orarates table: https://eosauthority.com/account/eosdtorclize?network=eos&scope=eosdtorclize&table=orarates&limit=10&mode=contract&sub=tables
  • Min Сollateralization is a parameter set by Equilibrium, and it establishes the collateralization level at which your position would be closed with enough collateral removed to repay the EOSDT loan.
  • Admin Fee  is an annualized fee charged by Equilibrium for the loan. It’s a running fee computed continuously, so that a correct pro-rata charge can be made whenever you close the position. It’s currently set to 1% and is payable in NUT tokens.
  • Liquidation Penalty  is an additional fee charged by Equilibrium, based on the value of your EOSDT position, if your position has to be liquidated.

You can find all of the parameters mentioned above on the main contract called eosdtcntract in the ctrsettings table under critical_ltv, governance_fee, and liquidation_penalty names respectively:

https://eosauthority.com/account/eosdtcntract?network=eos&scope=eosdtcntract&table=ctrsettings&limit=10&mode=contract&sub=tables

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Loans, fees, and investments

In this section, we’re going to look at securing an EOSDT loan. It starts by connecting an EOS wallet (like Scatter, TokenPocket or Keycat) to Equilibrium’s self-service gateway. Once connected, you can deposit EOS and generate EOSDT, which you can then transfer away, and later repay the EOSDT debt to close the position.

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  • Collateral  is the amount of EOS I deposited as collateral. This amount is stripped down from any total collateral balance appreciation.

For example:

  1. Current system state:

- current EOS balance = 100 EOS 

- total collateral = 90 EOS (the overall system has earned 10 EOS from liquidations and REX)

When I deposit 10 EOS, my actual collateral will be equal to: 

Position collateral = 10 * 90 / 100 = 9 EOS

The system will write this number in the positions table on eosdtcntract. The situation with my deposit goes as follows:

  1. System state after my deposit:

- current EOS balance = 110 EOS

- total collateral = 99 EOS

Now let’s assume I held my position over a period of time when the system earned an additional 10 EOS from liquidations and REX, and decided to close it (pay down my EOSDT) and withdraw my collateral.

  1. System state when I decide to withdraw:

- current EOS balance = 120 EOS

- total collateral = 99 EOS

If I pay down the EOSDT entirely and withdraw all of my collateral, I will get back: EOS out = 9 EOS * 120/99 ~ 10.9090 EOS. So the entire system earned EOS and I got my share! Be aware that the gateway actually shows the full value rather than the stripped down value. In the example above, I would see 10.9090 EOS in my position at https://gateway.eosdt.com.

Look at the positions table and collateral field here for further information: https://eosauthority.com/account/eosdtcntract?network=eos&scope=eosdtcntract&table=positions&limit=10&mode=contract&sub=tables

Let’s assume I generated 10 EOSDT when I deposited 8.3 EOS, and at the time of my deposit, the EOS price was roughly $3.08 USD.

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  • Collateral USD = 25.564. This is the USD value of that collateral at the time the position was created.
  • EOSDT = 10, the amount of EOSDT I created (borrowed).
  • Collateralization Ratio  is the value of my EOSDT relative to my collateral. The current minimum ratio is 130% — if you go that low, you can be liquidated immediately with even a small drop in EOS price. In my case, I’m using 255% collateralization: 25.564 / 10 ~ 2.564 = 255%

With my 10 EOSDT, I was able to purchase about 3.18 EOS at roughly 3.14 USD per EOS. This was done, of course, via an exchange that supports both EOSDT and EOS — I used Bancor.Network.

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There you have it — you’ve successfully leveraged your position! I had 8.3 EOS, but with help from EOSDT, I have 11.48 EOS in total (8.3 in collateral and the extra 3.18 I bought with my EOSDT).

Here is what Equilibrium's gateway shows me after I’ve pledged my EOS:

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Liquidation

Given the USD value of my collateral and the system’s critical collateralization ratio, I can calculate the liquidation price of my position:

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  • Liquidation price = [EOSDT generated] * [Min collateralization] / (Collateral EOS) = 10 * 1.3 / 8.3 = $1.566 USD.  This is the bare minimum EOS price my position needs in order to avoid liquidation. In fact, Equilibrium does this calculation for me on their gateway page.

To avoid liquidation, I would need to buy back all 10 EOSDT to repay my position. I would need 10/1.566 = 6.3856 EOS. Remember, I have collateralized 8.3 EOS and I bought an extra 3.1858 EOS.

I can further assess my liquidation risks if I assume that I collateralize the EOS I’ve bought plus some leftovers I had, totaling around 3.5 EOS.

  • New Liquidation price = [EOSDT generated] * [Min collateralization] / (Collateral EOS + EOS bought) = 10*1.3 / 11.8 = 1.10

The liquidation price assumes that EOS would need to drop (1.10–3.08)/3.08 ~ 64%. This might seem safe given that the maximum drop we’ve seen in EOS over one day is 28%.

Let’s next assume that EOS price dropped and I decided to get liquidated for some reason. Let’s see what happens in this case:

At an EOS price of $1.10, I will get a margin call. The system will need to cover my EOSDT debt in the amount of 10 EOSDT. The system will also penalize me for being liquidated (see above), and that penalty is currently set to 15 percent. So the total collateral I will lose is equal to:

  • Liquidated collateral = (10 EOSDT + 15% of 10 EOSDT)/1.10 = 10.4545 EOS.

After liquidation, my position will look like this:

EOS Collateral = 11.8 – 10.4545 = 1.3455

EOSDT Generated = 0 EOSDT

The liquidator contract will reflect the following balances:

bad_debt = 10 EOSDT

eos_balance = 10.4545

Given what the Equilibrium team says about liquidations in their Telegram group chat and on their website, anyone can buy out eos_balance at a 3% discount from the current price by submitting EOSDT to the liquidator contract to cancel out the bad_debt. So now let’s consider the following example:

EOS price hasn’t changed and is equal to 1.10 USD.

I go and buy 5 EOSDT for 5/1.10 = 4.545 EOS

I transfer that 5 EOSDT to liquidator contract and get back: 5 / (1.10 * (1–0.03)) = 4.6860 EOS

My profit is: 4.6860 EOS  -  4.545 EOS = 0.141 EOS, or around 0.1551 EOSDT.

Liquidator balances are now:

bad_debt = 5 EOSDT

eos_balance = 10.4545 – 4.6860 = 5.859 EOS

This liquidator example is purely theoretical. Be aware that I might be wrong somewhere. 

I hope you’ve enjoyed this walkthrough of how you can use Equilibrium to borrow EOSDT for use in leveraging your EOS position. I didn’t find anything else like this for the EOS blockchain (including a calculation model), so I hope this will shed some light on the Collateralized Debt Position model and how you can use it.

Now it’s up to you. Remember to consider all the risks when you create a significant leveraged position in EOS using Equilibrium.

If you’ve found this article useful for you in any way, or found any corrections that need to be made, let me know by leaving a comment. Have fun!


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