Contango: The looping layer of DeFi

Contango is the first non-custodial DeFi market to offer expirables, a new derivative that allows traders to buy or sell assets at a specific date and price in the future. But what is unique about Contango is that it allows traders to take exportable positions without order books or liquidity pools.

Contango

The three co-founders of Contango are Kamel Aouane, Bruno Bonanno, and Egill Hreinsson. The companies' main investors include Dlab, AngelDEO, Spartans, Jets Capital, BBS Finance and more.

Contango’s founders have also revealed that they re planning to launch similar integrations with other money market protocols including Compound, Spark, Maker DAO and Morpho soon.

Capitalising on the bullish market peak in crypto space back in 2021, the company has managed to raise $4.5 million in a relatively short span of time between their pre-seed and seed funding rounds. This growth has allowed the company to expand their team to six members and officially launch this project.

Contango's magic formula

Instead of using the standard known formula which is commonly used in traditional finance to calculate the theoretical price, Contango mimics the steps used to demonstrate the interest rate parity formula as the backbone of its trade protocol. So when a trader opens a position, the protocol borrows on the fixed rate market, swaps on the spot market, then lends it back on the fixed rate market. And if the trader wants to close the position, the protocol would reverse these steps.

However, Contango also integrates different formulas to take into account the traders’s collateral, which is used to reduce the amount of capital borrowed and quote you a better price.

Collateralization ratio and leverage

The fixed rate protocol that Contango offers fixed rates to borrowers and lenders through a zero-coupon bond like instrument. But borrowing on any fixed rate markets like this would require overcollateralization.

Contango uses the flash swap function on Uniswap, which goes a little like this: Contango first gets ETH from a flash swap, it then lends it to the fixed rate market, uses the resulting zcDAI from lending as collateral to borrow DAI and gives those DAI back to Uniswap, all in one atomic transaction.

Different contracts

At this point, Contango’s Arbitrum ill only offer limited pairs (ETHDAI, ETHUSDC, DAIUADC) with different maturities. But the company will launch more pairs with maturity in the future. The company also promises that they will be moving to Ethereal as well, so that is something that users can look forward to.

Tokenomics

Contango doesn’t have a proprietary token at the moment. Instead, every portion is tokenised as an NFT, with the prices of the NFT being set based on factors such as the market condition and collateral ratio at the time entry.

Diamond in the rough

While Contango does present many good opportunities for its users, I believe that this project is still a diamond in the rough. Thus, it is better to wait just a little longer before the company irons out all the nitty gritty details and clean up all the rough edges before you jump onboard this bandwagon.

But if you have decided to jump on board now, here are 3 things you should take note of:

1. Contango’s prices is reliant on the liquidity of these market. Thus, traders should also bear in mind the liquidity risk, or the possibility of thin liquidity on underlying markets.

2. Contango is also very susceptible to the movement of the market. Thus any sudden movements in price that could result in potential liquidations

3. There is also a smart contract risk, or the risk of using protocols that can be hacked and exploited. But Contango is currently undergoing multiple security audits to mitigate these risks.