Using DeFi’s core lego building block MakerDAO, Spark and Element Finance are working together to build a new fixed rate lending product built on top of a Spark Lend market. Spark will use Element Finance’s new AMM, Hyperdrive, which will allow users to take DAI loans on demand without any preset terms or expiration dates. This stands in stark contrast to other solutions that force users to take on a loan grouped into preset terms with set start and end dates, fragmenting market liquidity.
The Hyperdrive AMM is the next research leap from the Element Finance team on variable and fixed rate primitives. The AMM offers fixed rates as part of a variable/fixed market with no preset expiration dates, no fragmented liquidity between terms, and no LP rollovers, aka everlasting liquidity. Hyperdrive is a natural evolution of the concepts introduced in the initial Element Protocol.
To dive into Hyperdrive’s innovations and mechanisms, visit the announcement page.
Spark Protocol is building a modern lending engine that supports DAI, allowing the extension of the Maker Protocol's functionality to add tools such as the fixed rate Hyperdrive market.
MakerDAO will be able to monitor and adjust the supply of DAI in this market so that the borrowing rate always trends towards a certain level, effectively giving Maker additional tools to react to supply and demand for DAI, aside from Maker’s currently existing DAI Savings Rate (DSR) and Stability Fee.
Spark into Hyperdrive
Spark and Hyperdrive together can allow Maker to delve into an entirely new space for interacting with DAI supply and demand. It will let Maker offer fixed rate loans at an efficient spread from the variable rate and it will allow the market to set the fixed rate on its own:
- Maker provides liquidity into Hyperdrive’s pool built on top of this new lending market. Users can take out a fixed rate loan via Hyperdrive or they can long or short the fixed rate this pool offers.
- When fixed rates are higher than the borrowing rate, users can close their fixed rate loan for a profit or they can take a spread borrow position. Users can then get multiplied exposure to the fixed rate yield by collateralizing it on the Spark Lend market for DAI recursively until the rates converge, thus profiting from the spread.
- When fixed rates are lower than the borrowing rate, users can either take a fixed rate loan that pays less yield than the variable rate loan, or they may take a short position until the rates converge, getting multiplied variable rate exposure until the rates converge.
- As the LPs, Maker and other parties will collect fees from the trading activity.
- Because traders are the ones to move the rates, it mitigates the need for Maker to manually adjust the supply of DAI on the lending market to set the borrowing rate.
Interested in learning more? Check out the Hyperdrive page for a deep dive into the world of everlasting liquidity.
This is just the tip of the iceberg of what the Hyperdrive AMM will bring to the DeFi ecosystem. We have a lot more updates, content, simulations, and analyses coming soon.
To be clear, as noted in the first paragraph of the blog post, Hyperdrive has been developed by Element Finance, Inc., the company (sometimes also colloquially referred to as Element Labs or the Element Finance Team). It is not developed by the Element DAO, the Element Protocol (which is run by the Community), or by the Element Foundation. In fact, Hyperdrive is protocol-agnostic. Therefore, Element Finance’s launch of Hyperdrive was not connected to any governance proposal, or in connection with any specific protocol.
(We’ll try to make sure to keep using “Element Finance” to keep this clear, and we’re working on steps to make this even more clear! (Or is it clearer? We never get that right.))