[UNI-V1] Uniswap Liquidity Tokens as Collateral

The Uniswap liquidity token is essentially 50% ETH and 50% another token that does well while Uniswap volume outpaces volatility.

The two largest Uniswaps by ETH are DAI and MKR, so these would be good sources of collateral. It’s easy to oracle the value of uniswap liquidity tokens based on their underlying assets.

Uniswap MKR has 344 holders and a market cap of about $3.5mm

Uniswap DAI has 752 holders and a market cap of about $2.7mm.

Uniswap WETH never made sense to me but people still use it. 112 holders and a market cap of $2.5mm.

If we accept WBTC as collateral, the WBTC Uniswap would also be a good candidate, being 50% ETH and 50% BTC and having 55 holders and a market cap of $870k.

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Seems interesting, and it also seems like good incentives to add liquidity to the uniswap dai contract.

They’re a good source of collateral and holders will have good incentives for using it as collateral and paying stability fees.

Just to layout the risk of the collateral. It’s a bit more risky than 50% ETH, 50% DAI, as the eth price falls, dai is converted to eth. This snowballs but it’s still safer than holding 100% eth and there being a big crash.

Another issue might be Uniswap MKR. You might not want to allow using MKR as collateral.

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True!

Possibly, but probably not.

Having MKR as collateral (even in diluted form) causes incentive changes that start affecting core aspects of the system. I’m actually not 100% against MKR as collateral at some point in the future (to a very limited degree), but it’s a fundamental and important change that has wide reaching consequences. If we are to include MKR as collateral, it should be explicitly, not as part of a Uniswap token.

The Dai/Eth token is much more interesting to consider. I can see pros and cons there, but I still feel that the cons are pretty huge. @Jiecut lays out some great points (welcome to the forum, Jiecut!) as to the nature of that collateral. Likewise the WETH market is an interesting thought. Like you, I have no idea why people are trading it rather than wrapping it themselves, but it seems to be a proven phenomena.

I wouldn’t be against a risk analysis for Dai/Eth and Weth/Eth as collateral types. But there is definitely some complexity. The circularity of the Dai/Eth token worries me.

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The common denominator is that we should consider uniswap tokens for assets we already accept as collateral.

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