What is SavingBlocks?

SavingBlocks is a DeFi-powered crypto fintech giving everyone safe & easy access to DeFi savings - to a mobile savings app live on both app stores (Apple & Google). They recently graduated 1st from the cohort in the Founder Institute (the largest accelerator in the world based in Silicon Valley) and three technology partnerships with top-tier companies for bank custody, digital asset custody, and identity verification.

I have had the pleasure to work with the founders, Edouard & Diego, as an Advisor over the past few months on the SavingBlocks platform from the ground up, discussing, testing backend DeFi investment strategies, and envisioning DeFi into the core of SavingBlocks.

Let’s look at how.

How is SavingBlocks Optimizing DeFi in its Business Model?

The founders of SavingBlocks believe that the broader retail adoption of blockchain-based DeFi services is gradually increasing and is unlikely to impact consumer spending in TradFi in the near term.

Reasons include:

1. the only gradual legitimization of digital assets as an investable asset class,

2. unmanageable UI/UX for many dApps relative to legacy financial services providers,

3. the lack of regulatory safeguards to protect consumers and regulatory clarity that would attract more new entrants/capital,

4. narrow range of use cases and limited visibility into what those are.

One of the innovations of DeFi is the access it gives investors to relatively inexpensive liquidity secured by financial assets while allowing them to maintain complete control of their funds. While most traditional banks enable customers to deposit money or take out margin loans, the proceeds are used to purchase securities in an account where the lender has custody of the assets. The value of the currency is already lost within the different processes a bank takes with your money in the bank to generate returns.

Hence, SavingBlocks is focused on creating financial products that

1. leverages new technological capabilities (NFTs),

2. are easily understood (user-friendly UI, check here), and

3. provides value to owners of digital assets (5% fixed interest on your fiat deposits).

To give you an overview of what use cases SavingBlocks look into while reinvesting retail deposits, I’ve narrowed it down to the following case study.

What are the Use Cases Today, and How Will the Market Evolve in the Future?

A common question relates to who is actually participating in overcollateralized crypto credit markets. We believe the answer is primarily crypto-focused traders and investors.

From a borrower’s perspective, a user can commit crypto holdings as collateral in exchange for a loan denominated in a different crypto asset.

There are three main reasons why a borrower would seek an overcollateralized loan, including:

1. Increased yield, as a depositor can maintain exposure to capital appreciation of the collateral assets while simultaneously deploying borrowed assets across yield generating dapps or other investment strategies,

2. Liquidity requirements, as a token holder (e.g., someone who owns ETH, etc.) can source liquidity from the protocol without selling the underlying holdings, which would trigger a taxable event, and

3. Increased leverage can double down and construct a levered long or short position as a token holder.

The most common borrower is the sophisticated retail or institutional investor who deposits a volatile crypto asset as collateral (expecting the token value will remain stagnant or increase) in exchange for a loan denominated in another asset. This second asset is often more stable and is more suitable for generating yield/liquidity.

From a lender’s perspective, a user can deposit their crypto into a shared pool of assets in exchange for interest income.

With traditional bank interest rates at historic lows, many investors and traders seek ways to earn higher yields. DeFi credit markets provide an efficient method for crypto “HODLers” i.e., crypto holders intending to hold their positions indefinitely to increase returns on idle assets that are otherwise left idle.

For instance, a lender can deposit a stablecoin into a protocol such as Compound or Aave and earn a ~1-3%+ variable APY.

SavingBlocks uses platforms such as Compound & Aave and invests in diverse liquidity pools (stablecoin focused) that ensure that the 5% fixed interest rate is met for all users on SavingBlocks.

Let’s understand how the borrowing and Lending mechanics work in Compound & Aave.

A Deep Dive into Borrowing & Lending Mechanics

There are two primary models used by borrowing and lending projects, including:

1. collateralized debt markets (CDMs), where the protocol represents a two-sided credit market with both borrowing and lending capabilities, and

2. collateralized debt positions (CDPs), where a one-sided protocol allows users only to borrow crypto assets.

Within lending, there is a market for each approved crypto asset, and interest rates are algorithmically calculated based on the supply and demand for the asset.

• For instance, the interest rate for a particular coin will increase as the supply of the crypto decreases (fewer deposits) and/or the demand for the asset increases (more borrowings).

• In this context, CDMs are autonomous money markets that reduce the friction associated with traditional debt markets related to negotiating interest rates and other loan terms.

A Case Study on Compound

Transaction Overview

Once a lender’s wallet is connected to the Compound application (link here), the transaction process works as follows:

1. A lender deposits an approved crypto asset into the pool, which is then available for other users to borrow at a variable rate.

2. The lender receives a “cToken”, an interest-bearing ERC-20 token used to record ownership within a given market.

3. To close the position, the lender then exchanges cTokens back into the protocol to retrieve both the principal deposit and accrued interest (which are withdrawn from the lending pool).

Interest Rates Support Market Liquidity and Stability

Since Compound lends collateral assets to borrowers, lenders assume liquidity risk when supplying capital to a lending pool (also referred to as protocol risk), essentially the inability to withdraw the principal deposit amount and/or interest income. Compound does not guarantee liquidity to lenders or borrowers, but each lending pool must maintain sufficient liquidity such that assets are available for withdrawal at all times.

A Case Study on Aave

Founded in 2017 by Stani Kulechov, Aave is another popular CDM platform based out of London, UK.

Aave offers several new features, including:

1. Multiple lending pools: Aave supports multiple lending pools. Each pool consists of its own collection of tokens with independent interest rates and liquidity levels, which helps the protocol mitigate potential contagion risks.

   1. For example, the Ethereum AMM Liquidity Pool was the first liquidity pool launched on Aave and allows Uniswap or Balancer liquidity providers to deploy “LP tokens” as collateral.

   2. The interest rates and other market dynamics within the AMM Liquidity Pool are separate from other pools on Aave.

2. More stable borrowing rates: risk-averse users can borrow funds from Aave’s lending pools at a more stable interest rate. Importantly, these rates are regular (not fixed) as the protocol may adjust the borrowing rate given extreme market conditions, and lending rates are continuously variable.

3. Credit delegation: One offering on the Aave platform allows a lender to extend an unsecured loan to a known counterparty. The lender takes the credit risk, dictates which borrowers are eligible for participation, and sets the terms of the loan using a smart contract.

   1. For instance, Edouard can deposit an approved crypto asset into the Aave Protocol in exchange for ‘aTokens’. But instead of designating the aTokens as collateral to receive a loan, Edouard can set up a Credit Delegation Vault (CDV) and earn additional interest by “delegating” a line of credit to Diego with predetermined loan terms such as the borrowing limit and interest rate. Once delegated, Diego can use Edouard’s assets as collateral to withdraw funds from Aave. Since Diego does not deposit collateral, Edouard cannot enforce repayment, and the loan is therefore backed by trust.

4. Flashloans: an unsecured loan where the borrower receives and repays the loan in a single, multi-step transaction. In most cases, Flash loans are typically used to execute arbitrage transactions, refinance debt positions, and optimize returns across various dapps. But in general, Flash loans represent a three-act play:

   1. receive a loan,

   2. do something quickly with the loan, and

   3. repay the loan.

It is also worth noting the AAVE protocol recently launched a new upgrade, Aave V3, which includes new features, including cross-chain interoperability, improved capital efficiency, and new risk management capabilities.

Conclusion

DeFi means anyone, anywhere, may participate in investments. This is a significant advantage over banks. It is no longer just a developing and visionary concept and is being championed by forward-thinking technologists and entrepreneurs worldwide.

By renouncing traditional intermediaries, DeFi significantly reduces the barriers to entry and the cost of participation. Investing in a DeFi project means one does not have to go through a bank and make time-consuming, tedious, and frustrating phone calls/personal visits to ask for a loan.

Further, unlike traditional lending, there is no counterparty risk, so if one defaults, the entire debt is taken over by the system. In essence, DeFi is changing how the world behaves by opening up more financial opportunities to more people in better ways.

Just as the Internet was arguably the first large-scale application of connecting computer technology, DeFi is already arguably more impactful than blockchain and crypto combined.

By initially investing in Stablecoins (USDC & USDT), the provenance and reliability of investments stay transparent. SavingBlocks ensures you do not lose your investment and can withdraw your deposit anytime.

If you have any questions, feel free to reach out to Edouard, Diego, or me, and we’ll be happy to assist you to come onboard SavingBlocks.

Disclaimer:

SavingBlocks does not only reinvest deposits in Compound & AAVE.

In the coming weeks, we will dive deep into more articles that give you a view of how SavingBlocks investment strategies return a positive surplus yield.

Complete transparency, as promised.

The articles will illustrate some of the well-known DeFi protocols SavingBlocks use for its detailed investment strategies. We’ll dive into more case studies on Yield Farming on DEX pools, Lending to companies on-chain, and many more.