On The Radar: Lien Finance

A quick overview on Lien Finance, how it works and what it does.

How to create Immortal Options - Lien - Medium

Hello everyone! A new series I'd like to start here at DeFi Weekly is called "On the Radar" where I highlight the newest, exciting projects in the DeFi space. Many of these teams may be anonymous, unheard-of or still very early stages, regardless I hope DeFi Weekly is the place where you hear about them. I'll keep these short and to the point.


High Level

Today's piece is around Lien Finance, a stable-coin project that doesn't require over-collateralisation and run by anonymous developers.

The basic idea works a little like this:

  1. Anyone can deposit 1 ETH inside Lien, and they get back two tokens. One is called a Solid Bond Token (SBT) and the other is called a Liquid Bond Token (LBT)

  2. The Solid Bond Token is meant to be a very low price of ETH which you can assume will be the lowest (big assumption, yes I know)

  3. The Liquid Bond Token is meant to be the remaining value of that ETH which is speculative and tracks the price of ETH less the value of the SBT

  4. A new stable coin can be minted by depositing the SBT

  5. On maturity of the bond, LBT holders will be paid out the amount of the LBT

  6. Users can hold SBT, LBT or both


LBTs can be leveraged in unique ways to create interesting derivatives/options and don’t require margin calls since if the price drops holders don’t have access to any ETH.

The native stablecoin of Lien is called iDOL and relies on being backed by SBTs. However, at maturity of these bonds SBTs are destroyed and redeemed. This causes a problem where SBTs with different maturity dates will be forced to resolve their positions. Lien solves this through aggregating all SBTs inside a single contract and requiring users to extend or renew SBTs. This parts seems a bit shaky to me and I’d need to know more about it.

In the case that ETH falls below the SBT value, the price of IDOL fluctuates. I spoke to Lien and their response to this is that their coin is more like an “Investment Trust model” rather than an ultra stable stable coin. If you want hard redemption guarantees USDC is what they would recommend you hold instead although it comes with centralisation risks.


Summary

Lien Finance has a radically new stablecoin design with some untested assumptions that we'll have to wait and see how they play out. The team's choice of being fully anonymous is a new trend we're seeing in the space and I'm all for, provided the code is open source. The project makes many strong references to MakerDAO and being a superior stable coin with shade thrown at the governance in particular. Seems like the position to be the most decentralised stable coin will be one where we'll see some very hot competition emerge over the next few weeks although not a lucrative one with limited upside. Why do I say that? As much as we love the idea of DAI, liquidity is still only just at $100m after 2 years where as USDC and Tether are well into the billions. Maker as a token is worth $500m and wildly exceeds the P/E of many other protocol tokens. Either this is a SV premium, decentralised stable coin premium or just uniquely overpriced. The valuation of Lien and many other stable coins like it will be good to watch.

Sidenote: I’d love to hear what you thought about this! Do you want to keep receiving updates about the latest projects, less detail, more detail? Let me know :)