DeFi traders are piling into Prisma Finance, a new lending protocol offering a stablecoin exclusively backed by liquid staking tokens (LSTs).
Prisma launched on Sept. 1 and is conducting a guarded launch, meaning that it will progressively raise the borrowing limit of its stablecoin, mkUSD, while ensuring that the nascent protocol is operating as intended.
On Sept. 15, Prisma lifted the cap from $20M to $30M — that level was reached in less than two hours.
The primary yield opportunity driving the demand is a module called a “stability pool,” which has attracted over $21M worth of mkUSD. The stability pool is used to settle debts that need to be liquidated — in turn, the pool receives the liquidated users’ collateral, according to Prisma’s documentation. This mechanism was pioneered by Liquity, the issuer of the LUSD stablecoin, which is purely backed by ETH.
One of Prisma’s seven anonymous core contributors said that the decision to develop Prisma was, in a way, self-serving. “We as co-founders of the protocol are building it with ourselves as users in mind,” he said on the Edge Pod with DeFi Dad, an advisor of The Defiant. “We all participate in DeFi. We all hold LSTs. We all use collateralized debt protocols.”
Liquid Staking Boom
Prisma is leveraging narratives which have shown resilience through crypto’s bear market — one is liquid staking tokens (LSTs), assets which represent staked Ether. The sector has exploded since Ethereum enabled staked ETH withdrawals earlier this year — nearly 12M ETH, worth over $19B, is deployed in LSTs.
Another is stablecoins — DeFi heavyweights like Aave and Curve have launched stablecoins this year to join existing players like Frax and Maker.
And finally, Prisma is applying “veTokenomics” to its PRISMA token. This is a token model pioneered by Curve, a leading decentralized exchange, that gave rise to the competition for CRV liquidity incentives known as the “Curve Wars.”
With Curve, users lock the protocol’s CRV token in exchange for vote escrowed CRV (veCRV). Holding veCRV allows users to vote on the flow of CRV emissions to their liquidity pools of choice.
PRISMA will operate in a similar way — holders of vePRISMA can direct additional PRISMA rewards to those who are minting additional mkUSD debt, to the stability pool, to depositors of certain collaterals, or those providing liquidity to a PRISMA pair on Curve, according to the documentation.
The Prisma co-founder named Liquity, another collateralized debt protocol, as an inspiration for the protocol. The team behind Liquity has emphasized a governance-minimized approach to its development.
Despite this, holders of PRISMA have a high degree of control over the protocol, according to its anonymous co-founder. “There’s not a single economic parameter I can think of in the protocol that is not community controlled,” they said.
For example, Prisma can charge fees when users borrow mkUSD, when they pay back their loans, or on a continuous basis in the form of an interest rate.
To be sure, regardless of Prisma’s initial success, the project is still very new and entering a competitive space — users can already mint DAI against stETH and rETH, the two leading LSTs, using Maker and can also borrow other stablecoins against LSTs using Aave, DeFi’s largest money market.