Abracadabra Money (SPELL) is a DeFi lending platform which allows anyone to convert interest-bearing cryptocurrencies into stablecoins called Magic Internet Money (MIM). Investors can exchange MIM for other stablecoins such as DAI, USDC, and USDT.

Along with projects such as Olympus DAO and Convex Finance, Abracadabra represents the newest class of decentralized finance platforms: DeFi 2.0. Whereas the DeFi 1.0 era depended on renting liquidity (i.e., rewarding yield farmers in exchange for liquidity), DeFi 2.0 emphasizes protocol-owned liquidity, or POL.

Although Abracadabra might seem like yet another DeFi lending platform, it’s anything but. This guide explains what makes Abracadabra and itsSPELL and MIM tokens so magical.

What Is Abracadabra Money?

Abracadabra Money is a DeFi lending platform. It lets you deposit interest-bearing tokens from other protocols, such as Yearn Finance and Sushi as collateral in exchange for Magic Internet Money stablecoins. Once MIM is in your wallet, you can exchange it for other stablecoins or cryptocurrencies where MIM is accepted.

When you’re ready to get your collateral back, return the original MIM amount plus interest to unlock your tokens. If your collateral’s value drops below the loan-to-value ratio, the protocol takes possession of your collateral, an event called liquidation. On the plus side, you get to keep the MIM you borrowed.

However, that’s where Abracadabra’s similarities to other lending protocols end. DeFi lending protocols such as Compound and Aave mainly accept cryptocurrencies such as BTC, ETH, and stablecoins. But they fail to accommodate the explosive growth of yield-bearing tokens generated by users on platforms such as Yearn, Curve, and Sushi.

Abracadabra recognized that users with funds tied up in yield-farming pools wanted to borrow against those positions. Since interest-bearing tokens increase in value over time, the amount one can borrow keeps rising. Moreover, people holding interest-bearing tokens don’t want to give up their yields while their tokens are locked as collateral.

A solid lending platform for the billions of dollars worth of yield-bearing tokens didn’t exist, so Abracadabra Money built one. But instead of forking Compound and slapping a new token on top, Abracadabra uses bits and pieces of several protocols to create a more modular platform.

How Abracadabra Money Works

By now you know Abracadabra Money is a lending platform for interest-bearing tokens such as Yearn Finance tokens, xSushi, and so on. But you better understand how it works before you deposit your valuable yvWETH into it.

Isolated Lending Markets

On most DeFi lending platforms, if you deposit several types of collateral, your risk across each is the same. If one form of collateral has more risk than the other, your entire position hinges on that weaker link.

Instead, Abracadabra uses Kashi, an isolated risk market that allows you to open different Collateralized Debt Positions, or CDPs, for each asset you deposit. Then you can select an independent risk tolerance for each asset, i.e., you can borrow less against the riskier asset.

By adjusting how much MIM you borrow against multiple forms of collateral, you decrease your liquidation risk in the event that volatility affects one of your collateral assets.

Borrow MIM Stablecoins

Once you deposit interest-bearing tokens (ibTKNS) to Abracadabra and open a CDP, you may borrow MIM stablecoins. Even though MIM stands for Magic Internet Money, there’s more to MIM than mere sorcery.

MIM is an algorithmic stablecoin. Algorithmic stablecoins such as MIM are issued and burned from the circulating supply to keep their value pegged to the $1 mark. When a user deposits collateral to Abracadabra and takes out a MIM token loan, the platform mints fresh MIM into the supply, backed by the user’s ibTKNs in the Collateral Debt Position.

When you repay the MIM, the protocol burns MIM from the supply, reducing its overall circulation in the market. Those mechanics expand and contract the MIM supply, keeping it nailed to the stable $1 peg.

You can use MIM to buy other, more globally accepted stablecoins such as DAI and USDC, or you can buy Bitcoin with MIM directly on Bitfinex via the BTC/MIM pair.

Multichain DeFi & MIM Bridge

Abracadabra Money is blockchain-agnostic. The platform has no vested interest in one blockchain versus another. That’s why Abracadabra launched lending markets on various networks and allows MIM users to easily bridge between chains.

Abracadabra lending markets are available on Ethereum, Arbitrum, Fantom, Avalanche, and Binance Smart Chain. Pancakeswap users will probably prefer Abracadabra on BSC, while Trader Joe users will stick with Abracadabra on Avalanche. The choice is entirely yours and comes down to where you have assets and which chain has the liquidity you need.

Here’s the really cool thing about Abracadabra loans, regardless of which chain you use. If you want to mint the MIM on Fantom, because that’s where your assets are, but wish to spend them on Ethereum, Abracadabra has you covered. Use the MIM bridge provided by Abracadabra to teleport your MIM stablecoins to any supported chain.

Bribing Liquidity Providers with SPELL Tokens

This is where Abracadabra’s DeFi 2.0 credentials appear. If you’re unfamiliar with how DeFi protocols typically operate, they use yield farming to reward liquidity providers while retaining their liquidity.

Abracadabra does the same thing with SPELL tokens. In total, 63% of the SPELL token supply is allocated to incentivize liquidity providers. And the MIM + 3Crv Curve LP pool on Ethereum is its biggest recipient, which is no surprise considering the depth of Curve Finance’s total value locked (TVL).

But Ethereum liquidity providers aren’t getting all the SPELL. Abracadabra wants to push its multichain vision further by putting SPELL up for grabs on Fantom and Arbitrum as well.

Incentivizing liquidity providers with SPELL tokens worked well to get the word out on Abracadabra and achieve deep multichain liquidity. But issuing SPELL rewards dilutes the SPELL token and keeps the platform locked in battle against other DeFi upstarts with better rewards.

That’s why Abracadabra teamed up with Olympus to deliver a new product. 👇

The Olympus Pro Program

If you rent liquidity from providers in exchange for SPELL bribes long enough, there will likely come a day when those providers find better rewards elsewhere. When that day arrives, Abracadabra’s total value locked will dwindle — and due to the bottomless SPELL rewards, its token value  evaporates. What’s a DeFi platform to do?

Abracadabra partnered with Olympus DAO to take control of its liquidity. Protocol-owned liquidity, or POL means the deep liquidity it rents is under its permanent discretion. POL allows protocols like Abracadabra to focus on delivering better products without having to worry about its liquidity seeping away.

And The Olympus Pro program enables that security through a process called Bonding. With Bonding, LPs sell their liquidity to Abracadabra in exchange for discounted SPELL tokens. That gives LPs an instant profit on their position paid in SPELL and mitigates the risks of impermanent loss. At that point, they can cash out or stake the SPELL for additional gains.

The platform gradually reduces the SPELL farming incentives, and dilutes the existing supply by adding permanent liquidity to the Abracadabra treasury. As a consequence, the Abracadabra platform becomes more sovereign and builds long-term value reserves.

What is The SPELL Token?

SPELL is Abracadabra Money’s native token. It has three equally important roles within the ecosystem.

Use SPELL to Make Governance Decisions

SPELL is a governance token for the Abracadabra platform. Platform decisions are all made in a decentralized way — but to have your voice heard, you need SPELL tokens. Every SPELL token entitles you to one vote in governance matters.

Stake SPELL to Collect Abracadabra Platform Fees

You can stake SPELL tokens to receive sSPELL. You’ll collect a portion of interest, borrowing, and liquidation fees collected by Abracadabra in proportion to the amount of sSPELL you own. As your sSPELL collects fees, the platform automatically restakes those fees to compound your rewards continuously.

There’s a 24-hour lock on sSPELL once you stake — so make sure you’re ready to lock your SPELL for at least one day before trying it out.

Incentivizing Liquidity Through Yield Farming & Bonds

As mentioned earlier, the platform uses SPELL to reward liquidity providers who bring tokens to Abracadabra pools. It also uses SPELL to bribe veCRV holders on the Curve Finance platform to vote for the MIM pool to receive additional gauge weights. The heftier the MIM gauge weight, the more CRV rewards the MIM pool receives. If you’re interested in learning more about this process, Andre Cronje wrote an excellent post about.

Olympus Pro bonds also use SPELL. Abracadabra offers discounted SPELL tokens to buy LPs out of their positions, giving them instant profit and the platform permanent liquidity.

Conclusion

The Abracadabra ecosystem is an interesting result of protocol composability in DeFi. Composability allows protocols to click together like Lego pieces, creating new and increasingly efficient products for users.

In Abracadabra’s case, implementing a lending system for the untapped interest-bearing token sector has vaulted SPELL into the top 100 tokens ranked by market capitalization. Moreover, the platform’s move away from token dilution and toward protocol-owned liquidity à la Olympus Pro is bullish for its long-term sustainability.