Marginfi

Marginfi | July 9 2023 | Official Link: Marginfi

Marginfi is a lending/borrowing platform on Solana that works similarly to Aave or Compound on Ethereum.

Users can supply (lend) SOL and other tokens to earn interest.

Users can then borrow against their supplied collateral, paying interest for their loan.

By using the marginfi platform, users also earn points for their contributions. These points are extremely likely to translate directly into a token airdrop.

Users earn 1 point per day per dollar supplied and 4 points per day per dollar borrowed.

At this point in time Marginfi has around $7.66M in TVL (supplied crypto), which has spiked rapidly in the days following the announcement of the points program.

Understanding the Points Incentive

Most DeFi protocols nuke their own token’s price by providing liquidity incentives from the start.

For example, many DeFi protocol that launched in DeFi summer have charts that look like this:

DeFi protocols want to incentivize liquidity (more $ deposited on their platform) as more liquidity translates to lower slippage, better user experience, and more platform revenue generated.

In order to incentivize this liquidity, most platforms spin up a governance token and emit it to users as a reward for using the platform.

These emission incentives lead to fast inflation rates that cause the token price to crash down hard.

The points system created by Marginfi allows the platform to incentivize liquidity through speculation on a token, without emitting an actual token yet.

In a way, points are a placeholder for a token, meaning the platform gets the benefit of incentivizing platform adoption without having to launch a high inflation token that crashes in price.

When the time comes, they will have the option to airdrop a larger % of the token upfront, allowing it to find a fair market value without an aggressive emissions schedule (if they so choose).

MarginFi Thesis

By parking some capital in Marginfi, you’re simply earning interest on your Solana based crypto holdings while earning points. The points should translate to an airdrop (of unknown value) in the future.

Due to the points reward structure, it is expected that the airdrop would correspond directly to the number of points one has earned, meaning those who provide more liquidity for longer will get a larger airdrop.

At this point in time, there are too many unknown variables to accurately predict the value of a MarginFi token airdrop:

TVL at time of airdrop (more TVL, higher token value)
Token emissions post-airdrop
Token utility (fee accrual vs governance-only)
% of token allocated to airdrop
VC distribution ($3M raised from various VCs)

While many of the other variables are uncertain, we believe that there is a decent chance MarginFi is able to attract a large amount of TVL, which should directly translate to a higher token valuation (and a larger airdrop).

Bullish on Solana moving into the 2024 BTC halving cycle
Referral program

Bullish on Solana

We will be posting a deep dive on Solana and why we’re bullish moving into 2024. But the main point here is that as the price of SOL goes up, so does the TVL in DeFi protocols.

As a simple example, if 1,000,000 SOL is deposited into MarginFi and SOL is price at $20, there is $20M in TVL.

Should SOL price move to $100 and the 1,000,000 remains deposited, TVL increases to $100M.

A higher TVL should translate to a higher token valuation as one major factor in a token’s price is the Fully Diluted Valuation / TVL ratio:

Referral Program

Referrers earn bonus points equal to 10% of the points earned by those they refer (this does not subtract points from the referral user, the points are just added on).

The points rewards alone are a great way of incentivizing liquidity. But that liquidity is going to be somewhat limited to people who are already familiar with Solana DeFi.

By adding a referral program where referrals earn additional points, it incentivizes the onboarding of new users.

If Marginfi TVL experiences strong growth in relation to the overall DeFi market to grow, the referral program could further incentivize growth.

Points Farming Strategies

If you are bullish on SOL, an optimal strategy is to maximize the yield you’re earning on it through a liquid staking protocol such as Marinade Finance or Jito.

Jito is recommended as the yield is slightly higher at the moment (~7.5%).

For reference, Jito has been steadily growing in popularity and has seen its TVL double in the last month:

You can then supply your jitoSOL or mSOL to marginfi, to earn 1 mrgn point per day per dollar supplied + an additional small amount of yield (0.15% at the moment).

You now have the underlying exposure to SOL with an attached ~7.5% yield and you’re farming mrgn points on marginfi.

From there, you can take out a small USDC or USDT loan against your jitoSOL, swap it for UXD and then lend the UXD (algorithmic stablecoin on Solana) for UXP (governance and fee accrual token for UXD Protocol) rewards.

Alternatively, you could take out a small SOL loan for ~5% apr and stake it to earn ~7.5%, further amplifying your yield.

Because you earn 4 points per dollar borrowed, taking out a small loan, swapping it for something else, then re-supplying the swapped asset as more is an ideal way to maximize point earnings.

Let’s walk through a few strategies:

Bullish on SOL, Bullish on UXP:

Supply $10,000 worth of jitoSOL as collateral to Marginfi. Earn ~10,000 points per day + 7.5% interest through Jito.
Take out a small $500 USDC loan against your $10,000 worth of jitoSOL collateral. Earn an additional 2000 points per day, but pay ~5-6% APR on the loan (~$30/year).
Swap 500 USDC for 500 UXD. Supply it as collateral on Marginfi. Earn ~7% APY in UXP liquidity rewards. Earn an additional 500 points per day.

In terms of additional yield earned, steps 2 and 3 are pretty much a wash, but they do earn you an extra ~2500 mrgn points per day.

Bullish on SOL:

Supply $10,000 worth of jitoSOL as collateral to Marginfi. Earn ~10,000 points per day + 7.5% interest through Jito.
Take out a small loan of $500 worth of SOL against your $10,000 worth of jitoSOL collateral. Earn an additional 2000 points per day, but pay ~5% APR on the loan.
Swap SOL for jitoSOL, or stake the SOL directly on Jito for jitoSOL.
Supply the additional $500 worth of jitoSOL as collateral and earn 7.5% APY (a 2.5% net rate after subtracting the 5% APR you’re paying on the loan). Earn an additional 500 points.

In this scenario you have additional points upside if SOL goes up in price. Say SOL goes from $20 to $40, you’d be earning 4,000 points per day by borrowing SOL instead of 2,000.

Stablecoins, Bullish on UXP, Bullish on points

Supply 10,000 UXD as collateral to Marginfi. Earn ~10,000 points per day + ~7% interest in UXP rewards.
Take out a 2500 USDC loan against your 10,000 UXD collateral. Earn an additional 10,000 points per day, but pay ~5-6% APR on the loan (~$150/year).
Swap the 2500 USDC for 2500 UXD. Supply the 2500 UXD as collateral. Earn an additional 2500 points per day.

In this strategy, you forgo upside on SOL (as well as the downside risk). You can also take out a larger loan since stablecoins are much less volatile than SOL, which means you can earn significantly more points. This strategy earns a lot of interest in the form of UXP emissions. UXP emissions can be claimed and swapped daily for more UXD, or can be held if you’re bullish on UXD Protocol.

Health Factor

Make sure you monitor your loan health factor to avoid liquidation. If you do not have a solid grasp of liquidation risk and loan-to-value ratio, just aim to keep your health factor above 90% at all times and you won’t have much to worry about (don’t take out large loans against your supplied collateral).

A best practice for maintaining a good health factor is to only ever swap your loan out for pegged assets. For example, if you take out a stablecoin loan, best practice is to only ever swap it for other stablecoins. If you take out a SOL loan, best practice is to only ever swap it for a SOL staking derivative like jitoSOL or mSOL.

If you supply $10,000 worth of SOL, then take out a $3,000 USDC loan, then swap that USDC for SOL, you have essentially gone leveraged long on SOL, which is fine, but has increased the probability of getting liquidated.

In this example, let’s say SOL price drops by 50%.

You now only have $5,000 worth of SOL collateral, and still owe 3,000 USDC. Because you swapped your 3,000 USDC for SOL before it dropped in price you only have $1,500 worth of SOL left to pay back the USDC loan.

Alternatively, if SOL were to pump 2x, you’d have $20,000 in collateral backing a 3,000 USD loan, and an additional $6,000 worth of SOL to pay back the loan with.

Risks

The two main risks associated with using Marginfi include liquidation risk (outlined above) and smart contract risk.

Smart Contract Risk

This is a risk that the Marginfi smart contracts get exploited to steal or permanently freeze funds. This risk is inherent to all smart contracts and can never be fully eliminated, but can be mitigated in various ways.

Marginfi has undergone a code an audit by Ottersec, an independent security firm.

When you utilize tokens like jitoSOL or UXD, you are also taking on additional smart contract risk with Jito and UXD Protocol.

Liquidation Risk

Marginfi offers over-collateralized loans, which means loans must be backed by collateral of greater value than the loan. If the value of the collateral dips below a threshold (determined by asset LTVs), a user's position will be liquidated with a liquidation penalty.

Summary

In short, lending/borrowing on Marginfi is an opportunity to farm an airdrop and earn additional yield with fairly minimal risks.

Additionally, for those who are unfamiliar with DeFi, Marginfi provides a forgiving user experience and low Solana gas fees for anyone who wants to learn or experiment with DeFi for the first time.

The upside of Marginfi as a platform is potentially large in a bull market scenario where Solana comes back in a big way. Should Marginfi not take off, or the airdrop ends up being small, there is little risk or downside aside from smart contract risk.

Because of this, we feel re-positioning some capital that is already in stablecoins or SOL to the Marginfi platform is an asymmetric risk/reward opportunity.

MarginFi Referral Link: https://mfi.gg/r/2dd4f4e7-5086-429a-b478-8d7764ea93de