Sino Global Capital is excited to announce our investment in Oxygen. In this research note, we will share our thoughts on Oxygen’s potential and necessity to bring huge lending and borrowing services and facilities to the Solana and Serum ecosystem.
Major benefits of Oxygen:
- On-chain prime-brokerage at fast transaction speeds and low cost.
- Multiple-use of same collateral and lower liquidation risk.
- Market-based pricing for fair borrow / lending terms set by users
- In-pool trading for streamlined leveraged trading via DEXs.
- Support for tokens, synthetic products, non-linear assets, other assets -> all cross margined in the same account.
- The crucial first step to transform the current model of finance to make it more accessible and fair.
We at Sino believe that blockchain is the greatest innovation in technology since the internet, and DeFi has the potential to be it’s killer use case. However, for DeFi to truly become a legitimate alternative to traditional finance (TradFi), there should be minimal sacrifice in quality in lieu of the benefits of decentralization. Up until recently, the porting of traditional finance functions onto decentralized chains has encountered some issues, chiefly; speed, trustworthiness, ability to handle large order executions and complexity of products available to users. We believe that many of these issues have been addressed in some clever protocol designs on top of Ethereum, necessitated by its current inherent limitations. With the onset of Solana and the Serum ecosystem, we believe that the infrastructure is finally in place to create a new, fairer, and more accessible alternative to the TradFi system.
DeFi has grown in maturity to offer more complex services to individuals; from payments and borrow / lending to derivatives and insurance. The next step in the evolution of DeFi will be in offering more complex services to users at an institutional / protocol scale while remaining accessible for the average user; something not possible in TradFi. Some TradFi functions are unavailable to small investors and lie solely within the remit of large funds. One such function is prime brokerage.
What is prime brokerage?
Traditional prime brokerage refers to a suite of specialized services offered to large investors like hedge funds that, given the size of their trades and investments, could not be offered by a standard brokerage. Services include:
- Securities lending
- Custodial services
- Leveraged trade execution
- Cash management
- Structured products
- Synthetic products (e.g. swaps + others)
- Direct market access
The most critical role a prime brokerage plays is combining all of these services in one place in order to optimize the efficient execution of any market strategy.
Given the people and relationship-based nature of the industry, a prime brokerage can also offer more bespoke services to funds, for example; capital introductions/investor on-boarding, risk management advisory, and office space leasing.
The role of prime brokerages is essentially to allow funds the ability to outsource many of their investment activities so that they can focus on investment strategy. They provide the tools needed for these funds to execute their strategies.
While some of these “white glove” bespoke services are unsuitable for DeFi, the scaling, speed, and transparency constraints of some blockchains meant that even some of the suitable services could not be ported over. That all changed with Solana + Serum. Here’s where Oxygen steps in.
Overview of Oxygen
Oxygen is a DeFi Prime Brokerage Protocol allowing users access to some of the prime brokerage services previously reserved for large global investment funds. Holders of digital assets can use the Oxygen protocol to generate liquidity, earn yield, borrow assets to go short, and get trading leverage against a portfolio of assets. Oxygen aims to provide services that cater to the needs of DeFi applications, individual users as well as institutions.
Oxygen has begun by offering borrow / lending services via pools based infrastructure.
Users are given access to new features that increase portfolio utilization and provide for a larger range of strategies; all while being simple enough for new users to deploy quickly, for example, simple yield strategies.
As mentioned, users can create pools and deposit assets. Pools allow users to borrow and lend against their portfolio, giving rise to the following features:
- Allows the borrowing of one portfolio against another. This reduces margin call risk and leads to greater portfolio stability.
- Can use all assets in a portfolio as collateral, lower liquidation risk when borrowing.
- Can lend directly from pools on their terms (maturity, yield) according to market rate or limit order.
- Since assets lent out are guaranteed by borrowers own pool, users can maintain greater borrowing power for more capital efficiency.
Multiple-use of the same collateral
- Users can generate yield on their portfolio while borrowing other assets against that portfolio at the same time.
- The clearing price for borrow/lending is determined by Serum’s on-chain order book matching; ensuring fair price every time. Unlike existing lending protocols, the user can set their minimum rate to lend at.
Borrow / lending is just the beginning. The goal is to recreate traditional investment banking business units on-chain and make them available to everyone. Following the prime brokerage protocol rollout, Oxygen will be exploring the launch of other products including volatility trading and structured product constructors; allowing users to create their own structured products, all on-chain.
The features of Oxygen give users the ability to execute more strategies while managing their portfolio, thus maximizing yield. These include:
- Trading leverage: the provision of leverage no longer needs to be dominated by centralized exchanges. Users can increase their trading position while trading on the decentralized Serum DEX.
- Passive yield: Earn income on assets sitting in your wallet.
- Borrowing to short: Decentralized shorting of assets.
- Option writing: Custom products, write your own options.
We believe As DeFi continues to mature and mirror TradFi complexity, Oxygen will have a competitive advantage in the future; leveraging the super-fast transaction processing and, most importantly, low cost of Solana + Serum. As complexity grows, users need not fear the exponential rise in fees as seen on other chains like Ethereum.
Oxygen’s minimalist UI/UX and native app are also worth mentioning. They provide a secure and streamlined experience that should appeal to new users. Oxygen could be one of few projects in DeFi with the potential for rapid mass appeal. Particularly when leveraging MAPS.me.
We recommend reading our Solana investment thesis to get an idea of why projects are choosing to build on Solana.
As Oxygen leverages the Serum ecosystem, projects will integrate with or expand on the Oxygen protocol functionality to take advantage of DeFi composability.
- MAPS.me is one of the first major applications to build on Oxygen, allowing its more than 140 million users to earn passive income on assets in their native MAPS wallet. If this feature proves to be popular with the Travel apps user base, Oxygen will bring mainstream retail liquidity to the Serum ecosystem. If this integration proves successful, it could entice a wave of Web 2.0 companies with large user bases to do the same.
- Serum is the underlying decentralized order book matching engine that serves to connect borrowers’ and lenders’ liquidity efficiently across all of the various applications getting built around Solana, including Oxygen.
1. Deposit: Users create a new pool and deposit assets to the protocol. let’s say wBTC. The oxygen protocol issues the equivalent OXY_wBTC to the pool.
2. Lend: Users enable “generate yield”, signifying they want their assets to be lent out at a minimum yield. The protocol issues the user an IOU_wBTC, sends your OXY_wBTC underlying dex (Serum) with an order to sell the OXY_wBTC, and buy 1.0005 of wBTC_FUTURE.
3. Return assets: After 24 hours, 1.0005 wBTC_FUTURE turns into 1.0005 OXY_BTC (1 principal and 0.05% interest).
4. Borrow. The user enters a trade to borrow BTC at a specific rate for 1 day. If the borrow request is matched with a lender, they will receive 1 OXY_BTC and 1.05 OXY_DEBT_BTC.
5. Return assets. The borrower sends 1.05 OXY_BTC to the lender which burns their 1.05 OXY_DEBT_BTC
OXY Token Overview
Token holders control 100% of protocol net revenue.
- Oxygen charges a fee for all matches made in its debt market.
- The fee ranges from 7.5%-15% of the clearing rate.
- The token holders may decide to add additional fees on trading and liquidation.
- 1 token one vote.
- Can vote on binding governance initiatives.
- Token holders could vote to charge fees on trading from within pools, on liquidations, or from asset management features in the future.
- The token holder can also decide the discount schedule for token holders.
- Holding OXY reduces protocol fees — up to a maximum of 50%.
Risks and Threats
Lack of current liquidity
The short-term structure of the current market (24-hour terms) is preventative for sustaining liquidity as it requires constant engagement rather than a set and forgets option that has thrived in DeFi. As Oxygen builds out its higher level retail product and integrates it with Maps.Me, they will be in a great position to attract liquidity from both millions of Maps.me users and institutional investors — many of whom are also backers of Oxygen.
Competition from existing lending pools
Many of the core foundational features offered by Oxygen are not even on the road map of existing lending protocols. The real competition for the institutional features is being built out by a wide range of protocols — whether that is options, interest rate hedging, or structured products. Oxygen benefits from offering all of the core prime brokerage features in one place for lightning fast execution and strategy deployment. Oxygen’s institutional functionality at its foundation and granularity of underlying instruments will enable more flexibility for innovative abstraction layers.
Existing platforms model their APY on the liquid supply/demand. This is sufficient for retail market participants that just want to deposit funds at the prevailing, variable market rate, but leaves out participants that require specific terms. Oxygen gives users more control over their position. The user can set the minimum lending rate, so the funds are only deployed if the market-clearing price in the order book is above the user’s minimum lending rate. The transaction is tokenized in the form of an IOU contract and the market rate and term is fixed within it. These tokenized debt contracts can serve as building blocks for structured products, and risk management strategies like hedging, tranching, and securitization.
Oxygen offers a substantial leap forward in DeFi functionality and brings DeFi closer to mass adoption through strategic B2B2c integrations. The ability to customize financial instruments to fit specific requirements will help onboard larger, more sophisticated investors, and the option to actively trade assets that serve as collateral is a huge improvement in capital efficiency. Beyond innovative functionality; Oxygen’s integration with Maps.me’s 140M+ users will serve as a boon for retail DeFi on-boarding. These advantages position Oxygen as a key building block in the emerging DeFi Ecosystem.