One of the most influential impacts of cryptocurrency is decentralized finance or Defi, which involves regular finance services without the oversight of a central authority. Networks bring together users whose peer-to-peer financial activities will be monitored by the blockchain via smart contracts.
While the decentralized finance industry has only lasted a few years, it has gone on to be worth more than $100 billion. Despite its successes, there are many bottlenecks that still face the Defi industry. From security to lack of adequate regulation to govern the Defi space. One of the most important aspects of Defi is the lending industry. Unfortunately, it is constantly bogged down by how to recover money from defaulting borrowers.
Remember, there are no central authorities so lending protocols can’t turn to the government or a bank to help them get their money back. So how do they make sure their business stays profitable? Well, there are a number of ways including the use of over-collateralization and liquidation – something we will come back to later. For now, however, it is important to know that the Defi industry is still bogged down by many problems.
Despite its short lifespan, Abracadabra money’s net worth has risen to over $3 billion. In today’s video, we will be looking at the two main tokens that make up the Abracadabra ecosystem.
What is Abracadabra Money?
Abracadabra Money works by allowing users to collateralize digital assets in exchange for loans. The main currency of Abracadabra money is Magic Internet Money. MIM is a stablecoin pegged to us dollars.
Spell Token is reward users get for using abracadabra money. Abracadabra money is a lending protocol that relies on users depositing interest-bearing tokens(ibTKNS) as collateral in exchange for receiving loans in Magic Internet Money.
Abracadabra works like any other lending pool. A lending pool refers to a collection of cryptocurrencies contributed by users with the aim of giving out loans in exchange for profit. Lending pools allow individuals to borrow money without the oversight of a central authority.
Lending pools are sometimes run by private companies, however, the coins they hold still belong to community members. Abracadabra is one such lending pool. However, unlike many lending pools, Abracadabra operates on several blockchains including Ethereum, Tron, and Binance. The increases security on the platform and boosts operations while diversifying its growing user base.
Lending pools are very common in the Defi community. They are mainly used by traders for leverage. Leveraging simply means borrowing money to invest in expectation of profit. Ideally, the profit should be enough to cover the loan and the interest while leaving the trader with some profit. The advantage of this is it allows traders to execute more trades.
However, trading is risky so lenders need a way to protect themselves, so they use a process called over-collateralization. Overcollaterization involves pledging an amount more than the intended loan. This shows commitment to paying the debt since the borrower would be losing money if they refuse to pay it back. Once the collateral deposited drops too low and cannot support the loan taken, the borrower loses the collateral automatically.
What are Interest Bearing Tokens (ibTKNS)
Interest-bearing tokens are Defi tokens that represent a share in a decentralized lending pool. Interest-bearing tokens continue to increase in value because the underlying assets in the lending pool are continuously borrowed out and the borrowers are constantly paying interest on them.
Itokens can have a decrease in value if the underlying lending pool suffers a loss. iTokens are very popular in decentralized finance because their value keeps going up ensuring that lending risk is reduced. Users deposit interest-bearing tokens as collaterals on abracadabra money and they use it to borrow MIM.
How Does Abracadabra Lending pool work?
When people borrow money from Abracadabra, they receive the money in stablecoins. As some of you know, Stablecoins are cryptocurrencies that have their value tied to real-world assets. The most common stablecoins are backed by a fiat currency like dollars or euros. However, they are stable coins pegged to assets like Gold, and even stocks.
Fiat-backed stable coins keep their price peg level in a variety of ways including using cash reserves and algorithms. Abracadabra’s USD stablecoin, Magic Internet Money (MIM), relies on an arbitrage system to keep its dollar peg.
When users want to borrow money from Abracadabra, they have to deposit other cryptocurrencies as collateral in exchange for receiving a supply of Magic Internet money (MIM). There are generally two scenarios that can happen when taking loans through Abracadabra.
In the first case, the loan goes through. The user receives the MIM in exchange for their collateral. A payback date is agreed upon. Once the user is ready to pay, they have to deposit the amount borrowed to them alongside the agreed interest. Once complete, the money they pledged as collateral will be returned to them in full.
In the 2nd case, then the user is unable to pay their loan before the agreed time. When this happens, the user will automatically forfeit the asset they pledged. However, they will still get to keep their MIM. Users will also lose their collateral if its value drops below the value of the loan.
For this reason, leveraged trades need to be profitable otherwise, traders won’t pay back, so lenders rely on the liquidation of collateral assets to stop any loss of their money. Mind you, Magic Internet Money (MIM) can be traded for other stablecoins on several exchanges. However, it’s less common than some Interest bearing tokens on many exchanges.
Abracadabra allows yield farming on their platform. Yield farming simply means contributing to the lending pool in exchange for interest measured in yield-per-annum (APY).
There are generally two yield farming methods on Abracadabra. Many protocols take either the illiquid or liquid token approach. However, this limits the number of users they can cater to. Abracadabra combines both methods of liquidity farming to increase its user base as more liquidity providers can use their platform including those who have contributed their tokens to other liquidity pools.
In this approach, users who contribute to the lending pool will be given tokens that are unspendable. These tokens will act as receipts to confirm that a said user has contributed to the lending pool. It will also show the amount deposited and the expected interest.
This approach is quite similar to the former, however, the tokens given can be spent or traded. The market value of liquid tokens depends on smart contract dynamics and other market factors.
Who сreated Spell Token Crypto
Magic Internet Money was first introduced via social media. The logo went viral and soon inspired the creation of a fully decentralized stablecoin named Magic Internet Money. To this day, all the founders involved in the project remain anonymous – using only aliases. MIM is minted via a multi-signature contract that involves the following wallets
- Leo Cheng – Cream Finance (CREAM)
- Michael – Curve DAO Token (CRV)
- Julien – Stake DAO (SDT)
- C2tp – Convex Finance (CVX)
- Sifu – Wonderland (TIME)
- Poolpi – yearn. finance (YFI)
What Makes Abracadabra unique?
Abracadabra has implemented both methods of yield farming on its platform. Abracadabra allows users to deposit illiquid assets in exchange for a liquid token in the form of MIM. This allows Abracadabra to cater to a large number of users – especially those who have locked up funds in several yield farming platforms. However, MIM is still accepted on some platforms.
Abracadabra Money Tokenomics
MIM is a stablecoin that is soft-pegged to the U.S dollar. MIM is a stablecoin that uses an algorithm to keep its value consistent. MIM maintains its peg through arbitrage. Once MIM’s price drops below a dollar, the platform encourages arbitrageurs to buy MIM at a discount price and pay off some of their debt. If MIM’s price goes above $1, Abracadabra encourages arbitrageurs to borrow MIM and sell at a great price. MIM is an ERC-20 token meaning that it’s compatible with all Ethereum protocols.
Magic Internet Gold
Magic internet gold is the stablecoin pegged to Gold. It is called a troy ounce and its ticker symbol is XAU. One troy ounce equals an ounce of gold Users can hedge against volatility by investing in gold-backed stablecoins.
Spell token is the other cryptocurrency offered by Abracadabra. It is higher in quantity but its popularity is far less than MIM. It is used as a governance token that allows users to vote themselves or delegate voting powers to others. Spell token holders vote on what decisions to implement on the platform. The higher a person’s stake, the higher their voting power.
Spell tokens can also be staked in exchange for MIM. Token holders are allowed to contribute their tokens in exchange for MIM. The users are allowed to use the MIM, however, they bear the risk of losing their Spell token. Spell token holders who stake their tokens also earn periodically from trading fees on Abracadabra.
Spell token crypto is the main token that governs the Abracadabra network. Abracadabra network is a lending pool that combines different methods of yield farming so as to cater to a wide range of decentralized finance customers.
Users who intend to borrow money on Abracadabra must deposit an amount greater than what they intend to borrow. This is called over-collateralization, and it involves having borrowers deposit more money than they intend to borrow.
This shows their willingness to pay as not paying will result in a loss on the part of the borrowers. Liquidation means that a borrower forfeits their collateral deposit usually when the value of the loan cannot be supported by the collateral. Over-collateralization and liquidation help protect their lenders from risks as one of the most common use cases of Defi lending is leveraged trading which involves borrowing to trade in hope of a profit.
Once the money is deposited, borrowers are given the loan in form of Magic Internet Money.
Magic Internet Money is a stablecoin that uses an algorithm to keep its dollar price peg. Magic Internet money works by incentivizing holders to buy and sell so as to control its price. When MIM’s price drops below 1 dollar, users are encouraged to buy the stablecoin. When the price rises above 1 dollar, holders are encouraged to sell their MIM.
Spell Token is the native token of the Abracadabra network and it’s used for governance purposes. It is also used in Defi activities as Abracadabra allows users to stake their SPELL tokens in exchange for Magic Internet Money. Stakers are rewarded with interest on their spell tokens. They are also allowed to spend or use Magic Internet money. However, they would have to lose their spell token as a result.
Abracadabra takes an innovative approach to yield farming. The network allows users to contribute illiquid tokens in exchange for liquid tokens. This makes the Abracadabra lending pool very accessible to a large number of users from several lending protocols.
Abracadabra money was launched in 2021 meaning the project is still very young. While its difficult to predict the success of the projects, its present market performance is quite encouraging. It has survived several market crashes and maintains its 1 dollar peg till today.