The ICON DeFi Guide: Part 3 — Money Markets, Lending, and the OMM Network
(Note: This chapter focuses on the OMM Network. Most of the content is derived from the OMM whitepaper. While this chapter works to educate readers on the basics of OMM, there are some more advanced features that users may benefit from as well. If interested, I encourage you to read the whitepaper in it’s entirety.)
Before we start diving into Omm (Open Money Market), let’s take a quick look at the protocol’s analogue in traditional finance: money markets.
A “money market” may be a term you haven’t heard before, but it’s almost certainly a concept you’ve taken advantage of at some point in your life.
The simplest explanation of a money market is a market that provides either individuals or companies the ability to trade in short-term debt. In other words, it’s a way to borrow or lend on a relatively small time horizon (which could be anywhere from overnight to several months).
Two of the most common forms of money markets for individual consumers include a money market account, which works a lot like a standard savings account with a bank, or certificates of deposit (CDs), which allow you to deposit a set amount of money over a set amount of time in exchange for a modest interest rate.
There are a number of more advanced money markets that are typically utilized by companies and financial instutitions as well. For more details, be sure to read this Investopedia article.
The key factors behind money markets are the fact they are relatively low-risk ways to earn interest on your existing capital in a short-term manner. With that lower risk typically comes a lower return, however.
Money markets play an important role in our economy by allowing governments and corporations to keep their cash flow steady, and by allowing investors to earn a bit of a return on their capital.
Decentralized Money Markets
Just as MakerDAO (detailed in the prior chapter) represented the most notable platform for collateralized stable coins, there are two platforms that are arguably the leaders when it comes to decentralized money markets: Compound and Aave.
There are some nuanced differences between these two platforms in terms of features and mechanisms, but they generally operate in the same manner.
Just like a traditional money market, there are borrowers and lenders. However, rather than borrowers reaching agreements with individual lenders, they instead each utilize a pool of assets. As a lender, you deposit into the pool. As a borrower, you withdraw from the pool.
The interest rates that a lender can earn and a borrower must pay are primarily determined by the amount being lent and being borrowed. The more of an asset being lent, the lower the interest rate. But as the amount being borrowed increases, so does the interest rate. It operates similar to how supply and demand impact the price of an asset. In this analogy, just swap out the price for the interest rate. As demand to borrow goes up, so does interest. As the supply available to be borrowed increases, the interest rate goes down.
For a quick overview on how Compound and Aave work, be sure to give this short video from The Defiant a watch:
Utilizing this structure, the platforms are able to operate without a centralized middle-man (making them decentralized) in a transparent manner.
Of course, the description above is fairly general. The actual mechanisms for how borrowing and lending work are a bit more complex than described.
So let’s dive into them a bit by looking at Omm, the open money market operating on the ICON network.
What is Omm?
Omm operates similar to Compound and Aave, but does so on the ICON blockchain.
Any ICONist who hopes to earn additional money on their capital can earn interest by depositing stable coins (such as ICON dollars), ICX, or other IRC-2 tokens.
Not only will lenders be able to earn interest on their loans, but they’ll also be able to receive OMM tokens, which represent ownership in the protocol and entitle holders to certain rights (similar to how BALN tokens work, as covered in the prior chapter).
Meanwhile, ICONists who wish to leverage their existing capital are able to borrow funds. At a basic level, if they think ICX is about to increase in value, they could borrow funds to purchase more ICX.
Alternately, if they believe a token price is about to fall in value, a borrower could borrow that asset and sell it. Then, when the price falls, they could buy it again for a discount and get their loan amount back.
More notably is the fact that one of the assets that will be available on Omm at launch is USDb (Bridge Dollars). This means an individual could use their ICX to borrow more ICX, which they could deposit directly into their traditional bank account using the Bridge widget and Bridge Dollars. (I should note that Bridge Dollars — because they are only minted when a user deposits USD into their account — are another stablecoin on ICON genuinely backed by hard collateral.)
These are just some basic examples of why someone may want to use Omm to borrow funds, but you can already start to see the advantages of this platform.
How Omm Works
As described above, borrowers and lenders are essentially utilizing the same pool of funds.
Yet, because that pool contains a basket of different funds (because lenders deposit in one asset and lenders can withdraw a separate asset), there needs to be a mechanism to create fungibility across the pool.
Thus we have an IRC-2 token referred to as an oToken, which is essentially the internal currency of the Omm protocol. Borrowers receive oTokens in exchange for depositing assets, and will receive additional oTokens beyond that amount in the form of interest.
When the time comes to withdraw their funds, they simply exchange their oTokens. In return, they receive their original deposit amount, along with any interest they’ve accrued.
Now, you might be wondering: what about the risk-free interest rate I can get on my ICX simply by staking and voting on the network? Why should I lend when I can already get a return on my capital?
Fortunately, just like Balanced, Omm also utilizes sICX, meaning ICX deposits sent to Omm are sent to a Staking Pool contract, which will then issue sICX in proportion to the amount of ICX the user has in the Staking Pool.
While oToken and sICX processes help power the internal machinery of Omm, they primarily run behind the scenes, so regular users won’t need to understand the oToken process to use the protocol. It’s actually likely you’d never see the word “oToken” while using the platform itself. Nonetheless, they ensure functionality of the platform and the interest that a ICX holder would receive from staking on the network.
Like Balanced, Omm also has a liquidation risk, meaning that if the collateral you’ve deposited in order to take out a loan falls below a certain amount, your position will be closed out, meaning you’ll be able to get only a portion of your collateral back.
The liquidation threshold will likely be different for each pair. The more liquidity an asset has on the platform, the higher the threshold. The two pairs that will be available at launch — ICX and USDb — will have a collateralization ratio of 300%, meaning you must supply 3x as much liquidity as you wish to borrow. If the price of ICX drops enough to fall below the 300% threshold, your position will be liquidated.
Just like Balanced issues Balance tokens, Omm will issue OMM tokens to those who utilize the protocol.
Omm tokens will be distributed on a daily basis, with 40% of the daily distribution going to borrowers, 40% to lenders, and 20% to the initial (and future) contributors to the protocol in the form of OMM Worker Tokens.
For those earning OMM, the portion of OMM you receive depends on how much you are contributing to the protocol. For example, if the interest rate on USDb is much higher than ICX, you will receive more OMM tokens with the same amount of dollar value by depositing USDb instead of ICX.
OMM holders have the following rights:
- Adjustments to Loan to Value (LTV)
- Adjustments to Liquidation Threshold
- Adding new assets
- DAO fund management
- Adjustments to the interest rate model
- Adjustments to the interest rate parameters
- Adjustments to the oracle address
- Adjustments to OMM Worker Tokens (OWT)
Now, there are two things you may have noticed. First is the fact that I didn’t mention that OMM holders get a portion of the fees generated by the protocol like they do with Balanced.
Second is the fact that one of the governance rights available is “DAO fund management.”
From the beginning of the protocol’s operation, fees earned by the protocol will be deposited into a DAO fund (basically a fund controlled and operated by OMM token holders), rather than allocated to token holders.
However, it’s possible that in the future OMM holders may decide that token holders deserve some portion of the DAO fund and its future revenues.
This is actually similar to how COMP — the Compound governance token — operates. At the onset, COMP tokens only entitle holders to governance rights. Yet, that hasn’t prevented the token itself from holding a decent dollar value.
It’s unclear whether the price of COMP is derived from irrational exuberance, a belief it can earn fees in the future, or other reasons. It’s also unclear if OMM tokens will be treated the same way by the market.
Nonetheless, being able to have a say in the direction of the protocol in the future does hold some value — it’s just up to you to determine what that value is.
Similar to Balanced, the two primary risks one faces when utilizing Omm are smart contract risk (the chance the protocol has vulnerabilities that can be hacked), as well as liquidation risk.
Like Balanced, Omm has a savvy team working on the project and is putting the smart contract through an aggressive audit.
Between Balanced and Omm, we now have an ability to generate stable coins, borrow assets, and lend assets, all on the ICON network.
But now that we have these additional assets (and new tokens in the form of OMM and BALN), how can we trade them when they aren’t listed on exchanges?
That’s where automated market makers (AMMs) come in, which we’ll cover in the next chapter.
If you’d like to ask questions about DeFi, discuss strategies, or just have a general discussion, please join us in the ICON DeFi Discussion group I’ve created on Telegram to supplement this guide and build a vibrant DeFi community around ICON.