When Dollars are Ninety Cents

Vendor Finance
4 min readMar 28, 2023
USDC token collapse related to SVB case.
USDC token chart.

Hello Vendor Frens! (Frendors?)

We want to take a moment and highlight some of what we believe to be a couple of Vendor’s strongest use cases, especially in light of two events from this past few weeks.

First, the USDC depegging.

Per recent experience, some of the most stable positions in crypto carry some inherent instability. We suspect all of us were shocked on some level to see USDC trading for ninety cents. DeFi was full of opportunity at this point, not just from being able to speculate on buying USDC outright (the risk premium in our humble opinion was far less than ten percent!), but also the fact that many contracts which resemble real world derivatives, from futures to options and even more exotic constructions like Squeeth had varying dependencies on USDC (or even DAI/FRAX with a similar trajectory) as the denominator in many currency pairs. Pricing therefore was very much a matter of figuring out all of the complex interactions (and even time dependency) on what was likely to be a minimum of a weekend of uncertainty.

Vendor handled this perfectly.

Our lend/borrow pairs do not have an oracle dependency or any assumptions of value built into the model. Stablecoins are not fungible with each other, nor the USD itself. If I have borrowed USDC on Vendor with ETH collateral, I must return exactly USDC to reclaim the collateral. It does not matter what ETH is worth, nor USDC. I simply weigh my option between those (and this is very much an option!) and decide to repay or default. The choice is 100% mine. No liquidator or contract mechanism gets to decide this.

As a borrower, I can sleep at night knowing I have only time to make an informed decision.

As a lender, I can sleep at night knowing that I have extracted a premium for a known position, and am prepared to take either asset at the price determined by the Lend Ratio. It might not be a comfortable wait, but there is no decision that would keep me up at night, since I presumably charged what that risk is worth to me, up front.

Second, the Euler exploit.

Let us start by saying that we are 100% supportive of all of the users, founders, and community behind this very worthy project. This was not a rug, nor does it seem to encompass any negligence whatsoever. We are all building, together, in a bleeding edge space, and what does not kill us will make us stronger. We want to make absolutely clear that this is a dispassionate comparison of risks.

That said, while there is a lot of legitimate use case for models which have a liquidation element, all of these suffer from the same fundamental, existential risk that in any case where a contract (or a user interaction enabled by a contract) which requires accurate, real time data, to make a decision of great impact will also carry with it a whole lot of areas where things can go wrong. Oracle manipulation, asynchronous chain shenanigans, flash loans (a feature, mind you, but throwing a lot of money at something easily does test the limits of any financial system), and similar exploits, known and as yet unknown, can and do compromise what would otherwise be resilient structures.

Vendor does not have such a mechanism. There is no possibility of a liquidation, nor is there any support for any interaction once a loan is consummated other than the sole choice a borrower makes whether or not to repay before the time is up. In fact, the borrower can postpone that decision without loss, right up to a reasonable time buffer from the loan expiry. The borrower is also the only one with the skin in the game to make this decision, and the lender 100% takes the other side of this decision. There are no third party liquidators (which would represent a loss to the otherwise zero sum game between borrower and lender), nor is there any conflict of interest.

Conclusion

Vendor’s unique mechanism for matching a lender with a borrower effectively transforms a significant black swan style risk (liquidations, whether based on the reality of volatile prices or based on intentional manipulation) into a known, quantifiable risk (the value of an option between the lend and the borrow asset, for a specific strike and a specific expiry date) which the lender can easily charge to the borrower. Both parties are happy, nothing is lost in their two-party ecosystem, and available actions remain voluntary.

Thank you for reading, and please take a moment to check us out at vendor.finance — we promise we have a lot in store for you!

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