Sweep bridges DeFi and CeFi with collateralized margin lending.
Collateral pledges require a modified version of agreements that are standard in the securities industry. Sweep has developed agreement documents for open source release. Sweep has also developed a collateral agent to represent DeFi lenders, and relationships with borrowers, brokers, and custodians that accept the agreements.
Pledgor: This is the borrower. In the Sweep protocol, the pledgor might be a hedge fund that already does both crypto and fixed income trading, and is comfortable running a simple leveraged fixed income strategy that Sweep will fund.
Secured Party: This is the collateral agent, representing the Stabilizer and the DeFi lenders that fund the Stabilizer senior tranche.
Custodian, Tripartite Provider, or Securities Intermediary: This is a custodian that holds securities on behalf of the borrower or "pledgor".
An "account control agreement" or "Tripartite agreement" gives the Secured Party a right to declare a default and ask the Custodian to send the collateral, or the proceeds from collateral liquidation. The Pledgor instructs their Custodian to enter into this agreement.
A typical account control agreement adds collateral to the collateral account through manual instructions. This is useful for assigning a fixed amount of collateral to cover possible losses from a derivatives deal. The Sweep version of this agreement modifies the collateral assignment to be dynamic, like a margin trading account.
The loan agreement is an agreement between the Pledgor and the Secured Party. It describes a standard requirement for the Pledgor to set up a segregated account with an account control agreement. In other respects it is higly customized.
The loan agreement specifies an investment mandate. This is a description of the types of securities, or specific securities, that meet the safety and liquidity requirements of the lender.
The loan also describes terms that reference a Stabilizer. It references a specific Stabilizer address.
The Borrower has the responsibility to interact with the Stabilizer and other crypto addresses in order to implement borrowing and repayment.
Some economic terms come from the Stabilizer, rather than the document.
- Loan limits
- Required capital ration (junior tranche/loan value)
- Interest or value accrual terms
The loan agreement may specify wallet and account workflow. The Stabilizer will send funds to a specific address named in the agreement. The loan agreement may specify controls and workflow for converting USDx or SWEEP to USD that is wired to a specific segregated account.
The agreement specifies workflow for reporting and notification.
The Stabilizer or the funding protocol can post a request for repayment. If X days pass without repayment, then the collateral agent can declare a default and collect the collateral value.