Maximizing the Time Value of Cryptocurrency in Smart Contracts with Decentralized Money Markets

Abstract

Smart contracts on the Ethereum blockchain can be utilized as secure places to store cryptocurrency if they are designed carefully. However, while cryptocurrency is kept in smart contracts, such as being paid to a blockchain service, no extra profit is generated. The time value of cryptocurrency serves only as collateral, which is an issue of capital inefficiency. Therefore, we propose to maximize the time value of cryptocurrency in smart contracts by supplying it to decentralized money markets of Compound to earn supply interest. Furthermore, by utilizing the interest generated, we can mitigate the liquidity risk of Compound and thus do not diminish the flexibility of the original service much. Experiments are conducted to testify the proposed method, and the implementation cost is estimated to be 2.1 US dollars. We also discuss the potential systemic risk in the decentralized finance system.