Warp Finance has entered the decentralized finance (DeFi) scene with the intention of unlocking additional benefits for liquidity providers. Warp fulfills this objective with its never-before-seen use case for liquidity provisioning (LP) tokens generated from liquidity mining: collateralizing stablecoin loans. This project was born out of the recognition that, while liquidity mining has revolutionized the DeFi and blockchain industries, the process is still not perfect.
Liquidity mining is a liquidity-generating mechanism that creates liquidity to token markets, resolving a historic struggle blockchain has faced. However, the primary limitation of liquidity mining is that the memorialization of this process, LP tokens, can only really be used to distribute users’ shares of the transaction fees they accumulate while providing liquidity. There is presently over $1 billion dollars of total value locked into Uniswap, meaning that LP tokens from Uniswap represent over $1 billion of value, but have a very limited use.
Warp Finance has engineered a novel way to provide additional value to liquidity providers by allowing them to use LP tokens as collateral for stablecoin loans. First, users will be able to deposit LP tokens (initially, those from Uniswap) onto the Warp platform in an overcollateralized manner. Then, in exchange, they will receive a stablecoin loan while their LP tokens are staked in Uniswap’s rewards pool, still providing them with a continual reward from yield farming.
In essence, this lets Warp users “level up” their LP tokens; they can continue to restake/farm the stablecoins received from their loans (or use them however else they please), letting them leverage their LP tokens, which they are able to receive back once they repay their loan. This happens all while users are still able to earn the 0.3% rewards from Uniswap for liquidity providing.
An additional benefit to users is that these stablecoin loans will be effectively negative interest rate. The yield gained from staking a user’s LP token collateral via Uniswap could cancel out the interest rate on their loans and provide an additional return to users above interest deductions, with the surplus being paid out to the Warp user.
Overall, Warp Finance offers a novel opportunity for liquidity providers to “level up” their LP tokens. Thus, Warp users truly get the best of both words, being able to benefit from the stablecoin loan and their LP token collateral simultaneously. This makes them a project worth watching as we move into 2021.
Disclaimer: The writer has a personal relationship with Warp Finance and used this relationship to source insights for this article. The Daily Chain encourages you to carry out your own research before you make any form of investment and educate yourself about how to stay safe in the crypto space.