Thus far, the primary use case for the Shell Protocol has been as a market maker for stablecoins. However, shells (i.e. liquidity pool tokens) have the potential to constitute a new asset class.
Shells have three advantages over standalone stablecoins (or bitcoins):
Shells inherit the very liquidity utilized for swaps. Stablecoins in the pool can directly convert to shells, and vice versa shells can directly convert to stablecoins. In that sense, shells are natively liquid assets.
They are also a diversified portfolio of assets. For example, the current stablecoin pool has 30% DAI, 30% USDC, 30% USDT and 10% sUSD. The likelihood of one stablecoin losing its peg is higher than the risk of all stablecoins losing their peg.
Shells earn yield from their market making operations, 3.5 basis points of the pool’s trade volume. Given that shell tokens are diversified, inherently liquid and earn yield, they have the potential to be the best store of value of any crypto asset.
Using shells as collateral
These attributes, liquidity, diversification, yield, could make shells a desirable form of collateral for other protocols, such as Aave or Maker. Using shells as collateral would enable new ways to compose liquidity protocols with debt protocols. For example, one could use ETH to borrow DAI on Maker, deposit DAI into Shell, deposit shells into Aave, borrow USDC and deposit into Shell.
Short-comings of other protocols
Other liquidity protocols such as Uniswap, Balancer and Curve are not well-suited to this use case because they do not have any protections agains a broken stablecoin peg. For example, if USDT were to permanently lose its peg, the Curve 3-pool would also lose all of its value because it would be drained of all the DAI and USDC, and every Curve meta pool using the 3-pool would be drained of their corresponding liquidity.
In contrast, Shell has a minimum and maximum allocation for each stablecoin, which mitigates the downside risk. Without these protections, liquidity pool (LP) tokens become riskier with more diversification.
Therefore, shells are uniquely positioned for this use case.
From collateral to building block
Having shells accepted as collateral also furthers our long-term mission of creating the internet monetary system by helping other protocols become stablecoin agnostic.
As new stablecoins enter the market, there will be an increasing need for DeFi protocols to accept multiple stablecoins and not restrict their users. Stablecoin agnosticism is tantamount to operating as a stablecoin AMM: users will deposit stablecoin A and then go to withdraw stablecoin B.
For example, Maker is working on a “Peg Stability Module” (PSM), in which USDC can be swapped for newly minted DAI (and vice-versa). If Maker wants to include more than just USDC into the PSM, it will effectively operate as a stablecoin AMM. E.g., a trader could swap USDC->DAI and then swap DAI->USDT.
If lending pools decide to accept shells as collateral, they need not deal with individual stablecoins. In other words, other DeFi protocols can delegate the AMM logic to liquidity pools and interface with shells instead. In that way, shells can become more than just collateral but become an integral building block for other protocols.
In the case of Maker’s PSM, they could have DAI trade against a shell that was managed by the Maker DAO. The DAO would control the pools parameters and thus manage the PSM’s trading operations. For example, the DAO could set lower weights for riskier stablecoins.
The first step to incorporating shells into other protocols is to have them accepted as collateral.