The Other: Part of the Tarot Protocol
We introduce a novel DeFi primitive for liquidity providers.
A twofold revelation manifests, the mythical pattern is formed. In the presence of The Other, true unity is achieved.
What is The Other?
The Other is a new DeFi primitive, part of the Tarot Protocol, wherein LP tokens are supplied to The Other pools and individual tokens in the LP token pair serve as the collateral for borrowing and leverage.
The Other pools are designed to mitigate impermanent loss and maximize long-term compounding for yield farmers with a novel incentivization structure for borrowers of LP tokens. Liquidity providers can simply deposit their LP tokens into The Other pools to supply loans, and borrowers can use any token, or both tokens, in the LP token pair as collateral to borrow LP tokens.
The Other pools have many unique features and use cases, making them distinct from regular lending pools in Tarot:
- Lower target utilization rates
- Higher one-time borrow fees
- Single borrowable LP token
- Multiple collateral tokens
- Updated collateralization model (with collateral health factor)
Why Supply LP Tokens?
Deposited LP in The Other pools will continue to auto-compound and earn farming rewards until borrowed. Borrowing activity during periods of market volatility is expected to compensate for the impermanent loss incurred by yield farmers, reflected in an increasing quantity of LP tokens compared to ordinary auto-compounding of farming rewards.
Why Borrow LP Tokens?
Borrowers in The Other pools take on the possibility of “impermanent gain” when they borrow LP tokens with their underlying tokens as collateral, since a price move in either direction may result in cheaper debt relative to the collateral tokens backing the loan.
Borrowers are thus incentivized to borrow LP tokens during periods of market volatility, breaking them apart into collateral tokens and automatically mitigating impermanent loss for yield farmers during period of high market volatility with the compensating Supply APR and one-time borrow fees paid to lenders of LP tokens.
Composability and Future Developments
Each pool in The Other has its mirror opposite in Tarot. Borrowers can deposit LP in a regular lending pool, borrow individual tokens and deposit them as collateral in the corresponding pool in The Other, constructing heretofore unheard of leveraged positions with precisely-balanced collateral and borrowed LP token balances.
When a lending pool in Tarot has its mirror pool in The Other, the possibilities for composability are endless.
Additionally, the built-in impermanent loss mitigation of The Other pools make them an ideal home for long-term liquidity, in particular for protocol-owned and institutional LP.