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Banks take on deposits to invest part in riskier, illiquid assets – that’s how they earn money.
This business model “Leen Kort, Leen Lang” is also known as a fractional reserve banking. As long as not every retailer wants his money at the same time, everyone is happy!
When crisis mode strikes and users rush to the outputs, the risk models of banks are put to the test.
The core of the problem is non-transparency about the liabilities and available assets of a bank. You could prevent this problem theoretically if that information was visible because you could put together your own risk models.
Enter Infinifi, a new Defi protocol on Ethereum that aims to replicate the entire stacking fractional reserve bankin.
How it works:
- Users deposit stablecoins for IUSD reception stablecoin.
- For a lower risk trend, Stake Iusd for Siusd. This is liquid.
- For a higher risk revenue, IUSD for LiUSD. This is illiquid.
Now the component “Fractional Reserve Banking” is coming in.
Infinifi uses the Liquid Tranche Capital in lower risk returns money markets such as aave or liquid, while the sisd -illiquid tranche is optionally used in strategies with a higher risk return strategies. (Governance will ultimately determine these decisions.)
That exact ratio is informed by the demonstrated preferences of deposits and what options they select (Siusd vs Liusd).
The positive result? Infinifi may distribute reinforced yields for both Groups of deposits than when they had pursued their strategies individually.
Source: Infinifi
Based on the Infinifi website, whether you opt for a liquid (SIUSD) or locked (liusd) yield, you will receive a relatively superior yield than the underlying protocol.
Source: Infinifi.
It is a neat business model.
But what Infinifi does – borrowing briefly and borrowing for a long time – is not so different from what banks usually do.
The innovation comes from the fact that the entire stack is on the blockchain.
That is how you as a user can easily sleep at night and know that your bank does not pull Sam Bankman baked and strives an uncontrolled leverage against the most illiquid assets.
Infinifi’s reserve composition is completely transparent onchain, so you do not have to rely on a quarterly call report.
You can easily look up USDC deposits and IUSD tokens have been beaten to determine the exact mismatch of asset liability, if present.
You can also investigate the revenue strategies of the protocol, or that the protocol adheres to its liquidity buffers – to the quantity and type of assets they consist of.
Source: Dune.
In the case of a hack or ‘bank run’, an explicitly coded waterfall will determine who is paid in order.
The highest yield and locked liusd token holders are that First First absorbent losses in the shooting line.
