The Magic of Self-Lending With Peapods

Greetings, my fellow degenerate yield farmooors. You didn't think we forgot about you, did you?

Well, we got our eyes everywhere and are back today to talk to you about some magical potions that the wizards at Peapods are cooking up.

In our previous article, we already dived into all the basics you need to know about Peapods. We went over its history and origin story, covered its evolution to its present state, and also went over how different elements work. If you haven’t read that, I recommend checking it out before reading this one.

Done? Okay, let’s proceed.

Since we published that article, the Peapods team has revealed two HUGE upgrades to their product offering. Self-lending Pods and Meta Vaults.

Sounds cool doesn’t it? Well, put simply, they are.

So take a break from shitcoining in the trenches, grab yourself a nice drink, and sit back as we take you through the entirety of this new product, why it came about, how it works, and how you can profit from it.

It’s time to start Peapod-maxxing.

The chicken and the egg problem

Chickens and eggs in DeFi? Are food farms back? No no, they are not.

However, in the context of lending markets, a real chicken-and-egg problem exists.

With leveraged volatility farming (LVF), leverage is introduced through lending/borrowing markets native to Peapods. Using this interface, you can essentially get access to soft leverage, which will allow you to boost your returns on farming volatility.

But, initiating a lending market poses a problem.

Of course, a lending market needs both lenders and borrowers to be active for it to work. Lenders will look for a solid yield to attract their capital, while borrowers will look for solid liquidity in the pool to borrow frictionlessly.

With Peapods, their issues arose from wanting to stay truthful to being completely permissionless.

This means that whenever a new LVF Pod is created, each lending pool will start with $0 in liquidity. So, who steps in first?

With no liquidity, there is no borrow demand, so there is no yield to attract lenders. With no yield to attract lenders from the get-go, they have no incentive to supply their assets — it’s a major risk they are taking on whether that specific pool will be demanded by borrowers.

To add to this, the problem is further exacerbated because Peapods uses isolated lending pools to maintain security. While isolated liquidity pools are better for permissionless security, they are worse for liquidity. With liquidity and attention fragmented across multiple pools, the lenders have an even bigger issue in terms of choosing a pool.

So, how does one fix this?

The typical solution is to throw emissions at it, but we all know that ponzi crumbles.

Mercenary capital juices the emissions and then moves elsewhere leaving the protocol stranded for dead. It is completely unsustainable.

Peapod’s unique solution is self-lending Pods.

What are self-lending Pods?

The Peapods team created a novel mechanism of a self-lending Pod by combining different mechanisms that already exist in DeFi.

The idea is to allow anyone to create their very own isolated lending pool without requiring any external capital or emissions to seed liquidity. They can simply borrow from themselves.

Hold on now, borrow from yourself?! What kind of ponzi is getting cooked here?

Don’t worry, put those PTSD-ridden brain cells to rest. There is no obfuscated ponzi to worry about here. It’s the simple use of flashloans and liquidity providing that allows this to happen.

Rather than explaining it to you in complex technical jargon, let me just run you through a simplified example.

Let’s imagine a Pod with the pairing asset fUSDC. So to provide liquidity to this Pod you will need to provide fUSDC/pTKN. This means that the fUSDC will be coming from the USDC lending contract on Peapods.

But remember, the USDC lending pool has no liquidity.

So, a Pod creator can initiate a flashloan. For those who don’t know, a flashloan is a way to take a loan without any collateral, but the loan amount has to be paid back within the same transaction.

Therefore, by using a flashloan, the Pod creator can supply USDC to the lending pool, and using this supplied USDC they can receive fUSDC.

They then use the pTKN, which presumably they already have, pair it with fUSDC, and create an LP position.

Creating this LP position will, of course, give them a receipt token that represents their LP position.

If you remember, in our previous article, we said that these receipt LP tokens act as collateral for borrowing from the Peapods lending contract. This is the mechanism that ultimately unlocks leveraged volatility farming.

Therefore, by using this newly created LP position as collateral, the user can borrow back the amount borrowed during the initial flashloan from the lending pool and pay back the flashloan.

Therefore, you have now effectively created a proof-of-demand for that pool from nothing by being 100% of that pool's utilization. This should then kick in a wave of more natural borrowing and lending activities.

The Pods have become PODs. That’s a proof-of-demand joke for those of you who didn’t get it.

It may sound simple, but this concept of proof-of-demand is actually really clever.

You see, after the aforementioned scenario takes place, the user has effectively borrowed all the supply from the pool leaving it at 100% utilization. In a variable interest rate model like Peapods, the interest rates are determined by the level of utilization.

Translation - BIG JUICY APRs at the start.

A humble DeFi farmooor simply cannot help themselves when they see those big APRs flashing on the screen, so they will end up lending to capture some of that yield. Eventually, the yields will come down until an equilibrium is reached between borrowers and lenders, and that is when the market will settle.

The reason this is so clever is that beyond being good for LVF, it is actually an improvement of traditional DeFi lending.

Usually, interest rates start at 0%, and lenders are incentivized through emissions. These emissions only make sense if actual borrowing demand follows and sustains to keep up the yield. Most of the time, it does not.

In contrast, self-lending Pods already begin with an established borrower and don’t need emissions to sustain as the yields decrease (or increase) over time before finding an equilibrium rather than starting at 0.

So, if you really think about it, they have just made a reverse Dutch auction for DeFi lending market interest rates.

Yeah, I know, these mfs are smart.

But wait, there’s more.

The scenario explained here operates under the assumption that the borrowers can keep offering higher interest rates until they find a supplier. But what if, for some weird reason, the supplier never comes?

In this scenario, an increase in the token price can decrease the utilization ratio and, therefore, the interest rate.

That is because an appreciation in the price of the TKN creates an arbitrage opportunity against pTKN. In order to close this arbitrage, MEV bots inject paired asset liquidity into the lending contract, therefore increasing its liquidity supply. With fresh unborrowed funds in the lending contract, the utilization rate and thus the borrow rate reduces.

In this way, MEV bots automatically increase borrowable supplies as the price goes up, meaning there never even has to be a dedicated supplier. The whole system can work with just the initial pTKN supplier supplying their side of the capital. A true single-sided farm.

So now that you understand the technical side of it, I’m sure most of you are interested in only one thing, and that’s how you can use it to make money.

If you would like to know more details about how you can use this system and make money from it, I recommend checking out this thread.

Potential challenges for suppliers

So, at a high level, the self-lending Pod system is great. Liquidity can be seeded at no additional cost to anyone.

However, as we said, after liquidity is seeded, either third-party suppliers or an increase in the pTKN price is needed for the utilization ratio to decrease and, therefore, the interest rate before the lending market finds an equilibrium.

This effectively means that liquidity is attracted based on the manipulation of interest rates.

The issue with this is that most tokens in crypto are very volatile, which means that it is very likely that the pTKN will be very volatile. Volatile tokens mean volatile yields.

You see, Peapods uses isolated lending pools, which means the effect of volatile coins creating volatile interest rates is further exacerbated.

Volatile interest rates are no bueno for suppliers because they create uncertainty and a burden to constantly achieve the highest ROI. They will have to constantly rebalance liquidity between multiple pools to achieve the optimal yield.

Suppliers need to be on top of a couple of things.

They need to be able to appropriately identify and define their risk and rewards for supplying their assets so they can gauge whether the return is worth it. Additionally, they also need to spread risk across multiple pools because being in one isolated lending pool means that if anything goes wrong, all their capital is at risk in that one pool.

But with volatile interest rates it becomes difficult to gauge R:R, and with so many lending pools on offer in Peapods, monitoring and managing ‘em can be an absolute nightmare of a task for most people.

So what is the solution to this?

Enter the Meta-pVault

You can think of Meta-vaults (AKA pVaults) as the puppet masters pulling the strings for the Peapods show.

So Peapods has hundreds of different Pods but only a select number of pairing assets which include ETH, USDC, DAI, pOHM, apUSD. Each of these assets will have its own pVault into which users can deposit their assets.

These pVaults will then simply aggregate liquidity across the ecosystem and provide it to specific pools in a just-in-time manner. That means where there is demand for liquidity, the pVaults will automatically fulfill that demand, ensuring that the capital is always used in the most efficient way possible.

This way, suppliers do not need to bother manually monitoring and allocating their capital because the pVaults will do it for them, and at the same time, the borrowers benefit most because their demand will always be automatically met by the pVaults. Liquidity will be less of a concern.

The overall system is much more efficient, and everyone wins. The true definition of set and forget.

But that’s not all, there is an added element to the pVault system that may even benefit PEAS holders.

vlPEAS

Most of you may be familiar with the popular mechanism of vote-locking, which is when you lock your assets for a certain amount of time. The more PEAS you lock the more vlPEAS you receive.

Holders of this vlPEAS token are in complete control of the liquidity allocation of the pVaults.

Now, for most of you, this may sound like a classic bribe economy of directing emissions to gauges to attract liquidity. However, due to how the Peapods protocol works as a whole, the vlPEAS system works purely on incentive alignment.

For the suppliers, they want to maximize their yield while spreading their risk across pools, while borrowers want interest rates to decline so they can increase their profitability which then increases protocol TVL.

In this way, it makes more sense for suppliers to vote for as many new Pods as possible. The more Pods the vlPEAS holders vote for, the higher the likelihood that the liquidity will automatically find the most optimal route for profitability.

At the same time, as Pods get more votes, the utilization rate, and thereby, the interest rate, continues to decline. This means the borrowers are more profitable, and the protocol will attract more of them.

The Pod creator can also get a share of Pod revenue, so they are also incentivized in the same way as a borrower to vote for their Pods in order to get more utilization and earn more revenue.

Lastly, to tie it all together, the more productive and revenue-generating a Pod is, the more revenue share will be distributed to vlPEAS voters. So, they are also incentivized to vote on the most productive pods rather than the ones they have been bribed to vote for.

So, all stakeholders here have their own incentives to work for. This encourages a high level of governance participation amongst all stakeholders, which ultimately allows the market to align with the actual supply and demand dynamics appropriately.  

Talk about a flywheel, eh?

Concluding thoughts

In a market where innovation seems to have been stifled as everyone mortgages their houses to buy memecoins, Peapods is a huge refresher.

The team has been heads down and building since day one and don’t seem like stopping anytime soon. If there is anything I have learned in all my time doing crypto, it’s that you do not fade teams like this.

Plus, the proof is in the pudding. They are building a DeFi product without relying on unsustainable ponzinomics, and at the same time, they are creating truly novel mechanisms like self-lending that are actually major improvements of prior mechanisms and can be used for purposes beyond what most of us can imagine.

Teams that are moving the needle and pushing the boundaries with innovation regardless of market conditions are the teams you want to get behind. This new iteration of Peapods offers exactly that.

Fade at your own peril, anon. We’ll just continue PEAS-maxxing.