Why we invested in Mercurial Finance

Introduction

Stablecoins are an essential component of any decentralized finance (DeFi) ecosystem. The exponential increase of stablecoin holdings from $7Bn in June 2020 to $65Bn in May 2021 is clear evidence of widespread adoption. Stablecoins are the most intuitive assets for retail investors to denominate investments; and are also the dominant fiat on/off ramp medium of exchange. On centralized exchanges, stablecoins are the most common asset that other tokens are paired against. In addition, many investors are drawn into DeFi by the high beta-neutral yields offered by stablecoin farms. These factors have solidified stablecoins’ status as an indispensable part of DeFi.

Growing stablecoin supply. Source: Dune Analytics
Growing DEX volume. Source: Dune Analytics
Skyrocketing growth of stablecoin transactions. Source: Coinmetrics

Current Problems

The perennial problem that exists is the multitude of different stablecoin variants available (ie. USDT/USDC/DAI). Protocols utilize and implement each stablecoin variant for a myriad of different use-cases, often even issuing their own stablecoin (ie. LUSD on Liquity, alUSD on Alchemix). This fragmentation requires traders to exchange stablecoin variants as each use-case requires. Currently, the main 2 ways to exchange stablecoins on Solana are:

  1. Place order on Serum’s central limit order book (CLOBs) (various DEX interfaces)
  2. Swap on Serum’s Automated Market Maker (AMM) (various DEX interfaces)
  1. Deposit their stablecoin in a money market to earn interest (not live yet)
  2. Provide liquidity for stablecoin pairs on Serum’s AMM to earn swap fees and liquidity mining rewards if any (various DEX interfaces)

Mercurial Finance

Mercurial Finance (https://www.mercurial.finance/) is built on Solana, a highly scalable blockchain that is completely decentralized and permissionless. Solana is the optimal blockchain for Mercurial with its industry-leading 65K transactions per second, 400ms block times, and extremely low gas fees. In addition, Mercurial will be deeply integrated with Serum DEX, tapping into its orderbook flows and liquidity to reduce slippage and boost transactions on both systems.

The Solution

Mercurial Finance seeks to offer a holistic solution to both parties on the Solana ecosystem. — introducing the concept of dynamic vaults. These dynamic vaults will incorporate 2 important innovations:

  • High market volatility: Higher fees, reducing IL and capturing higher profits
  • Low market volatility: Lower fees to encourage trading

Benefits for traders

For traders, these innovations effectively solve their aforementioned problems by improving the utilization of the liquidity available, while simultaneously offering traders the benefit of 100x better slippage when swapping stablecoins versus traditional swaps. With both deep liquidity and low slippage, traders will be much more likely to utilize the Mercurial platform as their preferred swapping platform, thus driving the fees earned by liquidity providers.

Capital efficient swaps with dynamic fees. Source: Mercurial Finance

Benefits for lenders

On the other hand, these dynamic vaults attract liquidity from lenders by maximizing the yield for capital invested. This is accomplished via specialized on-chain algorithms which automatically deploy liquidity towards the highest yielding mechanism, including lending platforms, flash loans and external/cross-chain vaults.

  1. Interest paid from Dynamic Vaults
  2. Yield from native staking rewards
  • Staking LP tokens for liquidity mining of MER
  • Reinvestment in other Mercurial Vaults
  • Used as collateral on other lending platforms
Key aspects in a Mercurial vault. Source: https://www.mercurial.finance/Mercurial-Lite-Paper-v1.pdf

Seamless UX/UI

Mercurial Finance understands that a highly usable and seamless interface is critical for catalyzing the migration from centralized to decentralized platforms. As such, providing an intuitive interface and comfortable user experience are key priorities to Mercurial. The team is continually working to refine their UX/UI and develop design patterns that will minimize friction.

Clean Mercurial UI

MER Token

The native MER token is designed to have a wide range of mechanism that will accrue value to the token holders:

  1. Fees from usage of swaps
  2. Commissions from returns of the interest and yield accrued by the vault
  3. Collateral for synthetic stables

Risks & Threats

Competition: There are several stablecoin swap protocols being developed on the Solana ecosystem. Both borrowers and lenders ultimately will choose the platform that offers the greatest benefit to them, be it in terms of functionality, yield, fees or slippage. Mercurial Finance must offer the best solution on all fronts in order to firmly solidify its position as the preferred platform.

Future Opportunities

Integrations with other protocols: As more DeFi building blocks are developed on the Solana ecosystem, we expect that other DeFi applications will take advantage of Mercurial’s smart vaults for a variety of use-cases. For example, a leveraged yield farming protocol can borrow a large amount of a lower-interest stablecoin and utilize Mercurial’s low-slippage swaps to efficiently exchange it for any necessary stablecoin to fulfill a 50–50 ratio. For dapps that mint their own stablecoins, integrating with Mercurial will be essential to maximizing the composability and liquidity of their issued stablecoin.

Conclusion

Stablecoins are the bedrock for driving adoption and liquidity in any decentralized ecosystem. We believe Mercurial Finance is an important building block in further enhancing the efficiency of the Solana ecosystem, unlocking even greater value creation and opportunities for investors and traders alike. We look forward to partnering with and supporting the Mercurial team and its community in the future.

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Sino Global Capital

Sino Global Capital

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A team of former consulting, Wall Street, private equity, government, and corporate veterans accelerating the blockchain revolution