Delorean: The Marketplace for Future Yield

“This is what makes time travel possible: the flux capacitor!”

Before proceeding, there’s one concept we need to define. At the heart of the Delorean exchange is a calculation they refer to as the net present value of future yield. If a user has a certain amount of yield that will pay out in the future, NPV refers to the amount that that unrealized yield is worth today. That figure forms the basis for trading on the protocol: The seller receives the net present value today, while the buyer collects the full nominal value over time.

Now with that out of the way, let’s see what this process looks like in a little more detail.

Say you’ve got a token that pays some kind of dividend in ETH - GMX, for example. The current rates look good, but you’ve got other investments that you might be interested in. You could sell your tokens to fund the other opportunities. Or…

…you could use Delorean, sell the future value of your GMX yield, and - for a price - receive that yield upfront. Now you can finance those other opportunities while still maintaining exposure to the GMX you already hold.

The process is simple. You lock your tokens on the smart contract, then you receive Net Present Value (NPV) tokens equal to the present value of the future yield. Then, you can swap these NPV tokens - soft-pegged at 1:1 with ETH - using a protocol like Curve or Uniswap.

Since sellers are locking their tokens, they are effectively collateralizing them for a self-repaying loan denominated in NPV. Over time, this loan gets paid off on its own as the yield accrues. Once the full value has been accrued, the seller can withdraw the yield-bearing tokens they’ve deposited. If a seller wants to exit their position early, they can simply pay the ETH owed to settle their debt and unlock their tokens. Simple!

On the flip side, let’s say you’ve got some ETH and want to earn some more. With Delorean, you can find someone with a token that bears yield in ETH, then loan them that yield in advance for a cut of the future earnings. You’re essentially getting a portion of a token’s yield without taking on the risk associated with holding the underlying assets.

Here’s the gamble: when taking a position, buyers can’t be sure of how long it will take to accrue the full value of the future yield they’ve purchased. While Delorean can provide an estimate, the actual amount the buyer receives and how long it takes to accrue that value depend on how quickly the protocol pays out that future yield. Since it’s real yield we’re talking about, this is entirely dependent on the underlying protocol’s revenue, which can be unpredictable.

If the yield accrues quickly, the buyer will receive slightly less value overall, but they’ll get their money faster. If it takes longer to accrue, then vice versa. When a seller closes their position early, Delorean effectively treats it as though the future earnings have already been accrued and passes those earnings on to buyers so their positions can be repaid faster.

No matter how fast the loan is repaid, however, Delorean works in such a way that buyers receive a guaranteed APY of 8% or more. This is because the protocol discounts yield at that rate. Say you have $1000 worth of GMX, currently yielding 4.40% APY in ETH. Selling $100 of yield on those tokens would require $108 if repaid a year later, or $117 in two years. Either way, the resulting APY is 8%. And whats more, their protocol has a market mechanism that automatically adjusts this discount using a Uniswap integration. If there are lots of users selling future yield, the APY on the buyer side goes up.

This makes it possible for the buyer’s APY to be significantly higher, never falling below that 8% threshold. Not bad!

“Marty, don’t be such a square”

Aside from the typical risks associated with any DeFi protocol (bugs in smart contracts, use of the protocol in unforeseen ways, etc.), it’s important to be aware of the risks associated with buying and selling future yield with Delorean - even if it makes you a square.

Those risks include:

• NPV decoupling from ETH

If the market doesn’t think the discount rate or projected yield of the tokens whose future value is being sold on Delorean is correct, the price of an NPV token could fall below 1 ETH. This may be a concern for some, but you can read more about how the price of NPV is maintained in Delorean’s GitBook.

• The APY of an underlying asset collapsing

As the saying goes, “past performance is no guarantee of future results.” If an exchange supplying the fees of a yield-bearing asset collapses or its volume dies, for whatever reason, the amount of time it could take buyers to realize their future yield could stretch on to infinity.

For now, Delorean allows users to yield up to two years out. The longer the time frame a buyer has before their yield will be realized, the higher the risk will be that unforeseen circumstances subvert the buyer’s expectations. On the other hand, if a significant number of sellers decide to close their positions early, a lot of buyers could also receive their payments faster than expected.

“Roads? Where we’re going we don’t need roads.”

Delorean is currently building on top of GMX, a decentralized perpetual exchange operating on Arbitrum and Avalanche that offers up to 50x leverage on trading pairs.

On GMX, 70% of the fees generated by the platform get distributed to GLP holders - GMX’s token for liquidity providers - and the other 30% goes to those holding GMX’s governance token: GMX.

GMX and GLP are the first two tokens that Delorean will offer future yield trading on, which means they will initially be trafficking in yield based on the platform’s fees. Launched in August 2021, a historical look at the trading fees being accrued by the GMX exchange shows consistent growth over the last year and a half the exchange has been operating, and this is the basis for the yield that Delorean’s users will trade.

GMX operates on both Avalanche and Arbitrum and offers its own insight into activity on the platform via https://stats.gmx.io/. As you can see from the charts below, the bulk of the trading volume and resulting fees are coming from Arbitrum, which continues to attract more and more liquidity with each passing day.

The GMX exchange currently shows an APY of 4.40% on GMX (not including Multiplier Points) and 13.88% on GLP. Again, past performance is no guarantee of future results, but with the steady growth in trading volume on GMX, it stands to reason that lending rates and volume on Delorean could rise in lockstep with GMX’s fees. As Delorean grows, it will be interesting to see how these figures compare with more traditional lending platforms like Aave. When yield reaches a certain point, there will really be no reason to risk liquidation on a conventional lending platform when you could just collateralize your yield instead - not to mention the value of having a loan that repays itself.

"Why Don’t You Make Like A Tree And Get Outta Here?"

In an industry that’s gained a reputation for overpromising and underdelivering, Delorean’s goal of building a market around real yield sounds refreshingly sustainable. Moreover, with so many of the market’s woes caused by overleveraging over the past few years, the prospect of a loan backed by actual cash flow, with no risk of liquidation, sounds like a much more stable alternative to many of the opportunities currently available for lending out ETH. It would be nice to forget the excesses and failures that have happened over the past year or two in crypto. Maybe Delorean can help us all go back to the future.

Delorean is currently in early access, so head over to https://delorean.exchange/ to register - and if you’re curious to learn more, check out the white paper on their site.