Abracadabra.Money is a lending protocol that allows users to deposit interest-bearing assets in order to create Magic Internet Money, a multi-chain stablecoin. The basic purpose of Abracadabra is to free up otherwise stuck cash in DeFi, allowing users to yield-farm with leverage. The protocol accomplishes this by letting users deposit interest-bearing assets like LP tokens from DEXs, staking and yield-farming protocols as collateral for borrowing or minting MIM, a US dollar-pegged stablecoin.
Authors: Anushuk Bhojwani, Christian Viehof, Maximilan Bruckner
It's interesting to look at how ordinary yield farming and traditional decentralized stablecoins work to get a better understanding of Abracadabra's economics. Users deposit or invest liquid assets like USDT or SUSHI into yield farms like Yearn or Sushi in traditional yield farming. Users receive illiquid interest-bearing tokens like yUSDT and xSUSHI in exchange, which act as "receipts" for the original deposits as well as any accrued yield. In other words, liquid tokens go in and illiquid interest-bearing tokens come out. Commonly in traditional decentralized protocols, to receive liquid stablecoin tokens like DAI, you must deposit liquid assets like Ethereum or USDC as collateral. That implies liquid tokens go in and out of the system. Abracadabra, on the other hand, is a hybrid of the two methods. Users can employ illiquid interest-bearing tokens like yUSDT and xSUSHI as collateral to create a liquid asset called MIM. This enables leveraged yield farming by releasing stranded capital or converting otherwise illiquid assets into liquid assets.
SPELL - It is the platform's incentive token, which encourages users to deposit their LPs into Abracadabra in order to earn a yield on a range of LPs such as the MIM-ETH and SPELL-ETH pools.
sSPELL - This is used for fee-sharing & governance and is obtained through staking SPELL tokens. Interest and borrowing costs from users who mint/borrow MIM, as well as around 10% of liquidation fees, are all seized and used to buy SPELL, which is then proportionally distributed to single-sided SPELL stakers (sSPELL holders).
MIM - a USD pegged stable-coin that is borrowed & minted when ibTokens (Interest-bearing tokens) are deposited as collateral.
Collateral tokens - All tokens eligible as collateral have been identified with ITINs and classified according to the ITC framework. A list of the tokens can be found in the Tokenbase.
Figure 1 - Tokenbase list with Abracadabra’s LP tokens (Source: https://bit.ly/2ZZIF36)
The SPELL token incentivizes users to deposit SPELL into the single-sided SPELL vault and earn interest, in return users receive the sSPELL token. After that, users can use their sSPELL to mint and borrow MIM with a maximum collateralization ratio of 85 percent. This simply means that for every $1000 in SPELL, it is possible to borrow $850 in MIM, minus the fees. Through a term called folding/looping, individuals can use their MIM and purchase even more SPELL, which can be staked further and can generate even more interest. MIM can also be borrowed against ibTokens,, these can include xSUSHI, yvUSDC, and so on.
Abracadabra uses the Kashi Lending Technology to provide isolated lending markets that allow users to deposit any token they wish. When compared to traditional lending markets, this allows customers to modify their collateral ratio more freely, and hence modify their risk tolerance based on the collateral they deposit. Figure 2 displays the variety of ibTokens that can be deposited as collateral in Abracadabra and the respective interest rates charged for the different ibTokens, it also displays the amount of MIM that can still be borrowed and the liquidation fee.
Figure 2 - Abracadabra displays a variety of ibTokens that can be used as collateral (source: https://abracadabra.money/stand)
A market in which risk is not shared collectively is known as an isolated risk market. Because risk is shared among users on platforms like Compound and Aave, users can only provide liquidity for a limited number of tokens. The Kashi Lending technology known as BentoBox, on the other hand, allows users to supply liquidity for any token because it employs isolated risk markets. The lending engine takes advantage of synergies with other DeFi protocols to enable some effective yield farming tactics. Kashi's wide range of tokens is supported by a one-of-a-kind segregated market system. Unlike traditional DeFi money markets, where high-risk assets might jeopardize the entire protocol, each market in Kashi is completely distinct (similar to the Sushiswap DEX), which means that the risk of assets in one lending market has no bearing on the risk of assets in another lending market.
Figure 3 - Process of leveraging a USDT position (source: https://bit.ly/3o3ynXO)
Abracadabra Money takes a new method by not only leveraging the use of interest-bearing tokens, but also exponentially leveraging the borrowing of them. Figure 2 visualizes the steps for leveraging a position and below are the steps that explain how Abracadabra allows users to leverage yielding positions:
Step 1 - Deposit stablecoin (e.g. USDT) into yEarn to receive an interest-bearing token (yvUSDT)
Step 2 - Deposit yvUSDT into Abracadabra money as collateral
Step 3 - Select a leverage level (customizable in the Abracadabra dashboard) and borrow the corresponding amount of MIM
Step 4 - Swap the MIM into USDT
Step 5 - Deposit USDT to yEarn again to receive yvUSDT
Step 6 - Deposit yvUSDT into Abracadabra Money to borrow more MIM
This methodology is incredibly efficient, especially when using interest-bearing tokens, as long as users keep their collateral ratio and risk tolerance under control. Abracadabra Money improves users' capital efficiency while also allowing them to earn dividends on their tokens.
Liquidation risk - This is the underlying risk involved with all borrowing & lending protocols. When depositing collateral in Abracadabra, for example ibTokens, if the value of the ibTokens falls below the value of the MIM borrowed, then the ibTokens will be open for liquidation. This position liquidates the ibTokens that are deposited but the user still gets to keep the MIM borrowed.
Smart contract bugs - Bugs are quite common in smart contracts, which is why it is suggested by many experts that smart contracts need to be audited before being deployed on the network. Recent reports published have shown that many bugs in the smart contracts can be fixed if audited properly.
Figure 4: The Spell Tokenbase entry (Source: https://itin.itsa.global/DZXJ6MVZ4)
Economic Purpose (EEP): Spell is listed as a Settlement and Governance Token (EEP22TU03) due to its design as a means of collateral combined with governance functionality.
Industry Type (EIN): The issuer of Spell is active in the field of Decentralized Lending, Saving and Asset Management (EIN06DF02).
Technological Setup (TTS): Spell is an Ethereum ERC-20 Standard Token (TTS41BC). The Class "Ethereum ERC-20 Standard Token" captures every Token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.
Legal Clam (LLC): Spell does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. Spell’s platform is built by a team of programmers and engineers that make up the core contributors. It’s Issuer Type is a Private Sector Legal Entity (LIT61PV).
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information of the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). Spell qualifies as an Utility Token (REU52) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
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Anushuk Bhojwani is currently writing his master thesis with Frankfurt School of Finance & Management on the topic "Why should corporate treasuries allocate between 1% - 5% of their investment in Bitcoin in contrast to traditional investments and what are the main drivers for this allocation?". He is currently working in the Treasury department at BorgWarner Inc. and also pursuing his master's degree in finance at Frankfurt School. He has also classified many security tokens for the Tokenbase for ITSA e.V. He has a diverse background with significant time spent in Spain, India and currently Germany. You can contact him via anushuk.bhojwani@icloud.com and connect on Linkedin if you would like to further discuss ITSA e.V or have any open questions.
Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via christian.viehof@itsa.global and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.
Maximilian Bruckner is Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He has a strong international background with significant time spent in Spain, South Africa, and Canada. Currently pursuing studies at the Frankfurt School of Finance and Management, you can contact him via maximilian.bruckner@itsa.global and connect on LinkedIn if you would like to further discuss ITSA e.V. or have any other open questions.
