Providing liquidity on Serenus compared to Uniswap
|Serenus Coin||Feb 16, 2019|
Serenus Coin is a DEX that produces a crypto-collateral dollar pegged stablecoin. It does this by allowing issuers to create contracts that users can mint or burn serenus from. Users do this by sending ether or serenus, respectively, into an issuer contract. For more see this introductory article.
Why create an issuer contract?
Since November last year, liquidity providers on Uniswap have earned fees by providing the ability for users to swap between ether and a variety of ERC-20 tokens. MKR and Dai are the biggest markets sofar. The fees are good but changes in price also affect profitability. Understanding how providers’ exposures to ether and those tokens vary as the price changes is complicated. To get some idea of the difficulty here see this article on uniswap fees and a follow-up article comparing holding just ether to participating in the ETH/Dai pool.
In general, a liquidity provider on uniswap will lose money if the price of ETH/Dai moves either up or down from the initial price when they joined the pool. Their potential profits are non-linear with respect to price movements.
Issuer contracts also collect fees as users swap back and forth between ether and serenus. Issuers target a particular collateral ratio and provide some initial capital as ether. From there the contracts receive ether up to a maximum derived from the target collateral ratio. If users wish to sell serenus, they stand ready to send ether back to them. The price of ether/serenus is set by an oracle contract.
Unlike on uniswap, issuers on the serenus system have a strictly linear profit/loss exposure to price changes in ETH/SRS while collecting fees. This is a much easier system to both understand and, if needed, hedge.
An example issuer
Suppose that ETH/USD is currently trading at $100:
Open an issuer contract with a target collateral ratio of 150%.
Send 1 ETH into the contract as initial capital.
Users are now able to interact directly with this contract or through the DEX on serenuscoin.com.
At this price, and given the target of 150%, users may over time sell up to 2 ETH into the contract, paying 0.2% in fees to the issuer contract each time they do so (there is a 0.1% fee to Serenus Coin too).
The issuer contract is now long 3 ETH and has a 200 SRS liability. An issuer wishing to hedge their ETH exposure simply has to short 3 ETH elsewhere. The best current options are with ether futures on Kraken, OKEx or SETH on dYdX.
If the price goes up to $200, the 200 SRS liability will only be worth 1 ETH. If a user sends in 200 SRS, the issuer contract will have 2 ETH (worth $400) from a starting point of 1 ETH (worth $100). It is in effect a leveraged long ETH/USD position.
If the price goes down, however, the issuer contract will be in danger of takeover by anyone else as the collateral ratio falls below 120%. This danger can be managed by the issuer owner in one of two ways: either send in more ether as capital or pay in serenus to the contract. Both of these actions will increase the collateral ratio.
Being an issuer on the Serenus Coin system is a good way to collect fees on long term ether holdings while being able to manage the exposure to price movements easily.