What is Abracadabra Money? How to Borrow MIM using wMEMO (Explained)

DCV - January 11, 2022

Hi! The DeFi space is a fast-moving world with new platforms coming out every month. If you've stumbled upon this article, I'm assuming you already know a bit about decentralized finance, different blockchains, and at least some of the projects.

This post will talk a bit about what Abracadabra Money is. Also, I’ll go over how I borrowed money with the wMEMO token, how the user interface works, how to repay a loan and also (9,9)-ing. If you don’t know what (9,9)-ing is, don’t worry I’ll explain it in detail but in short, it's a way to leverage certain tokens to increase the interest rate return on them. Let’s get started.

What is Abracadabra Money?

Quoted from the documentation, “Abracadabra.money is a lending platform that uses interest-bearing tokens as collateral to borrow a USD pegged stablecoin (Magic Internet Money - MIM), that can be used as any other traditional stablecoin.”

What does this mean? Let’s break it down. 

  • A lending platform is a place to borrow money. Pretty self explanatory.

  • In DeFi, interest bearing tokens are tokens that act like a receipt or voucher that proves ownership to some assets that generate passive income that a person has lent out. For example, I deposit $100 worth of USDC into a Yearn Finance vault and receive back about 100 yvUSDC tokens. The Yearn Vault token (yvUSDC) is the interest bearing token and proof that I have loaned out my $100 worth of USDC. It is also proof that I am able to earn interest on the deposited funds.

  • Prior to Abracadabra, the problem with holding the yvUSDC token is that my funds are locked up in the Yearn Finance vault and I can’t access my deposited USDC to do something else without withdrawing from the vault.

  • Abracadabra has allowed users to offer up their interest bearing tokens (and other assets) to be used as collateral to borrow money. Collateral is something of value offered to Abracadabra if the borrower fails to pay back the loan. Continuing with my example, I would deposit my yvUSDC token into Abracadabra as collateral and based on the value of the token, I can borrow some amount of the MIM stablecoin which for all intents and purposes, 1 MIM is equal to 1 dollar.

So, the takeaway is that Abracadabra Money is a platform for borrowing money using passive income tokens as collateral.

If my collateral loses a certain amount of value, Abracadabra will automatically sell my collateral to pay back the loan. This is called liquidation. I don't want to be liquidated.

Abracadabra has included other tokens to be used as collateral so that people can borrow with Shiba, Cake, Binance Coin, Avalanche token and more. They continue to grow as the DeFi space gets more and more connected.

How does the borrowing work?

First, to borrow money, I need assets to offer for collateral and somewhere to hold those assets. Abracadabra doesn’t support every coin and token so I’ll have to see on the website what can be used as collateral. Here, I’ll just use the wrapped MEMO (wMEMO) token as an example. wMEMO is an interest bearing token of the TIME Wonderland protocol. The wallet I’m using to hold wMEMO and other assets is the Metamask wallet.

Looking at the available components to borrow on the Avalanche network, I can supply AVAX, some Trader Joe LP tokens, wrapped Memo, and xJoe tokens. 

  • The “Total MIM Borrowed” column shows how much MIM has been borrowed by people.
  • The “MIMs Left to Borrow” column shows how much MIM is left to borrow for that collateral type. If the amount in this column is 0, I have to wait until someone pays back their loan to borrow more MIM. I can keep refreshing the page to see if that number goes up.
  • The “Interest” column tells me how much interest is charged to me per year. For example, if I borrowed $100 worth of MIM, a 5% interest will charge me $5 in MIM for the year.
  • The “Liquidation Fee” column tells me how much I will be charged if my collateral needs to be sold to repay the loan.

If I click the wMEMO row, Abracadabra brings me to the borrow page where it asks me to deposit wMEMO as collateral to borrow MIM.

I can input the amount of wMEMO I want to use as collateral and specify the percentage of collateral I want to receive as MIM. Selecting 25% will give me about $772 worth of MIM. The “Expected Liquidation Price” is what the price of the wMEMO token must fall to for the protocol to sell my wMEMO tokens to cover the loan. I don’t want this to happen because then I would lose my wMEMO tokens.

Notice that I can’t borrow more than the value of the collateral. This means if I borrow funds, my loan is over collateralized or the value of my collateral at the time of borrowing is more than how much I borrowed. The lower the percentage I borrow, the safer the loan is.

To borrow, I just have to input an amount of MIM to borrow and click "Add Collateral and Borrow". Clicking on the “Add Collateral and Borrow” button will execute a smart contract to deposit my collateral from my Metamask in the form of wMEMO tokens. After a few confirmations and a few mintues, MIM will be deposited into my Metamask. I can now do whatever I want with the MIM.

After borrowing, my loan information would look like this:

How do I manage a loan?

There’s a section called “My Open Position” that tells me all the information about my loan, my collateral, my APY, and other important information to tell me about the health of my loan.

  • The collateral deposited is the amount of wMEMO I’m borrowing against.
  • The collateral value is the market value in USD of my wMEMO.
  • The position APY is the interest rate I’m earning on my wrapped MEMO.
  • The MIM borrowed is how much I’ve borrowed. I borrowed only $5 of MIM but here it says that I borrowed $5.05. This is because there is a 1% borrow fee that gets charged to me every time I borrow.
  • Most importantly is probably the liquidation price which is the price, if my wMEMO drops to, that will cause Abracadabra to sell my collateral to repay the loan.
  • Finally, there is the MIM available left for me to borrow given my collateral amount and value.

If I am close to liquidation, I can choose to add collateral by depositing more wMEMO or repay some or all of the loan using MIM to prevent liquidation. 

Repaying my loan

Here, I’m just going to show how I repaid my loan of 5 MIM. I click “Repay”, and select the max amount of MIM to repay. Since I want to keep my collateral deposited to maybe borrow more later, I’m going to set this “Remove Collateral” field to zero. I click “Repay”, approve the transaction on Metamask and then confirm the transaction to repay the loan. Be aware that I need to have enough AVAX in my Metamask to pay for the transaction fees.

Once I see my MIM balance in my Metamask wallet update, I can refresh the page in Abracadabra to see that I no longer owe any more MIM.

I don’t ever want to inadvertently remove any collateral without repaying any of the MIM loan. This would make the loan more risky, causing the liquidation price to increase and I could risk my collateral being liquidated.

(9,9)-ing and looping

The last thing I’ll talk about is what is (9,9)-ing and looping and how it’s done on Abracadabra.

Like I said before, (9,9)-ing is a method used to increase the interest earned from interest bearing tokens by using leverage. This can be very risky as with anything to do with borrowing crypto. How this works is best explained with an example (see figure below).

I know that I can deposit my wMEMO on Abracadabra to get MIM. What I can do with that MIM is buy TIME tokens on Trader Joe, then stake it on Wonderland to get more wMEMO and then once again use it to deposit on Abracadabra to get more MIM.

This process can be repeated a certain amount of times before I run out of the ability to borrow any more MIM. The process of leveraging over and over again is called looping and it can double my earned APY rate without having to add any more of my own funds. The trade off is that it is riskier and requires more work to monitor the position.

When this “Change Leverage” option is selected, Abracadabra is automating this entire (9,9)-ing and looping process in one transaction. They call this entering a “leveraged yielding position”.

Using this slider here, I can make my position riskier by moving it to the right, increasing my leverage and therefore increasing my earned APY interest. Or I can make it safer by moving the slider to the left. I can also make it more safe by updating the initial amount of MIM to borrow in the “Borrow MIM” field.

When using this "Change Leverage" option, I won’t be receiving any MIM. I will just be increasing my wMEMO position in a leveraged way giving me an increased APY interest rate.

It’s very important to realize that if I get liquidated using this strategy, I end up with nothing whereas if I just borrow regularly without the “Change Leverage” option, I still have the MIM that I borrowed, I just no longer have my collateral.

To go through with the (9,9)-ing and looping method, I selected “Change Leverage” and clicked that I understand that I’m using leverage and then input the amount of MIM I want to leverage. 

Since MIM is in high demand with wMEMO as collateral, I can only leverage with a small amount right now. The MIM supply is constantly being replenished, so I have to always check back.

Since I’m only using such a small amount of MIM, I want to leverage as much as I can moving the slider to the right.

Then, I click “Borrow”. Metamask pops up for me to approve and confirm the transaction.

Once everything has gone through, I can refresh the page to see my leveraged yielding position with my increased APY interest rate.

And that’s it for Abracadabra Money, borrowing with collateral, (9,9)-ing and looping with a single click. I just want to reiterate that using leverage is very risky and that none of this is financial advice. Thanks for reading!

Useful Resources:

Abra protocol docs: https://docs.abracadabra.money/

Wonderland docs: https://docs.wonderland.money/

YouTube version of this post:

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