QuiD Protocol
Price Discrimination
Some Borrowers are more Equal than Others
Instead of paying protection fees while maintaining their debt merely below the value of their collateral, Debtors may commit to a more conservative risk tolerance by starting out more over-collateralised than the maximum LTV, and choosing to sustain a threshold below it whereupon they will be considered in default. In exchange, they receive a proportional discount on their protection fees, while providing equal contingent compensation to Creditors as the Debtor’s collateral is now guaranteed to exceed the value of their debt on default.
To mirror the above, rather than being required to back the entire bundle of puts, being exposed to defaulted Pledges across the entire moneyness spectrum (range of Pledges’ over-collateralisations), Creditors may be given choice over the range of Debtor over-collateralisation they wish to provide solvency to. This way their funds are exposed to a more fixed rather than variable level of risk. Risk-free profits come from consensus-stake gains on the underlying collateral of defaulted Pledges with higher than maximum LTV commitments, as explained in the previous paragraph. Such individualised risk tolerance may be constrained using two or more tranches.
A junior tranche would offer higher protection fees, but take losses from the most under-collateralized defaulted Pledges, while a senior tranche will earn much less in fees absorbing more over-collateralised Pledges. There will be a higher volume of defaulted Pledges passing through the junior tranche, thus it will earn more consensus-staking rewards. All of the above price discrimination, plus the capability to fractionalise ownership in a deposit, makes way for the representation of Debtors’ and Creditors’ deposits as NFTs, a la Uniswap V3 LPs.
When users stake multiple different currencies as collateral for diversification, “buying” a basket synthetic put, they inject a heterogeneous mix of risks into the risk budget. As such, their collateral assets must be treated as a portfolio. Portfolio risk is a framework which considers each asset type’s individual risk profile as well as its correlation with the rest of the portfolio’s constituents: they are all evaluated holistically as a wave weaved into other waves.
Using PoS consensus stakes as collateral, whose fundamental value is relatively uncorrelated as natively yield-bearing crypto-currencies mediated by technologically independent distributed ledgers, we set the trajectory for a diversified portfolio where the smallest unit of aggregated collateral reserves can be worth exactly one QD however you slice the risk budget.
In due time, Pledge-able assets will include crypto<>QD cfMM shares, and sufficiently mature digital goods NFTs with reliable decentralised price feeds. All in all, such diversification better aligns backing requirements with the actual risk of the portfolio, increasing capital efficiency and opening the door to strategies that were previously the sole purview of large institutional investors, like hedge funds taking advanced short positions (see Risk Reversal).
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