0% Interest Loans - Borrowing Stablecoins
All Lendr Network stablecoins that exist are created through our borrowing mechanism. Users must provide 110%+ collateral in the native blockchain token in order to borrow stablecoins.
This means that 110%+ collateral was provided for all stablecoins in existence. There are no pre-minted/unbacked tokens for our team, investors, or anyone else.
Lendr offers interest-free (0%) loans that are more capital-efficient than other on-chain borrowing systems, requiring less collateral for the same loan (minimum of 110%).
Instead of having to sell your native blockchain tokens to have access to liquid funds, you can lock your collateral in the Lendr protocol and withdraw stablecoins of your choice. This allows you to maintain exposure to native blockchain tokens while having spendable funds.
You can repay your loan at any time to regain your collateral.
For example, borrowers speculating on future ETH or BNB price increases can use the protocol to leverage their native token positions up to 11 times, increasing their exposure to price changes.
This is possible because Lendr Network stablecoins can be borrowed against native blockchain tokens, and sold on the open market to purchase more of them — rinse and repeat.*
Since there is no ongoing interest rate, borrowers can hold their position as long as they like (assuming their collateral remains high enough).
*Note: This is not a recommendation for how to use Lendr Network stablecoins. Leverage can be risky and should be used only by those with experience.
Collateral is any asset that a borrower must provide to take out a loan, acting as a security for the debt. Currently, the Lendr Network supports ETH (on Ethereum) and BNB (on BSC) as collateral.
The Lendr protocol charges one-time borrowing and redemption fees that support the system and are algorithmically adjusted based on the last redemption time.
- For example: If more redemptions are happening (which means a stablecoin is likely trading at less than its target price), the borrowing fee would continue to increase, discouraging borrowing.
Other systems (e.g. MakerDAO) require variable interest rates that need to be managed via governance to make borrowing more or less favorable. Lendr Network instead opts for a fully decentralized and direct feedback mechanism via one-off fees.
USDL VS Major Stablecoins
To borrow you must open a Trove (CDP) and deposit a certain amount of collateral to it. Then you can withdraw stablecoins up to a minimum collateral ratio of 110%. A minimum debt of 1000 stablecoins on Ethereum and 50 stablecoins on Binance Smart Chain is required.
A Trove represents your loan position, saving information about your collateral and debt. Each Trove is linked to a wallet address and each address can have just one Trove. If you are familiar with Vaults or CDPs from other platforms, Troves are similar in concept.
Troves maintain two balances: one is an asset acting as collateral and the other is a debt denominated in the stablecoin. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Trove’s collateral ratio changes accordingly.
You can close your Trove at any time by fully paying off your debt.
Every time you draw stablecoins to your Trove, a one-off borrowing fee is charged on the drawn amount and added to your debt.
Please note that the borrowing fee is variable (and determined algorithmically) and has a minimum value of 0.5% or 2.5%, depending on the token, under normal operation. The fee is 0% during Recovery Mode.
Another consideration is the price of the stablecoin at the time of payment. For example, if at the time you want to repay your loan, the stablecoin is trading at $1.02 on the market and you need to buy it, you are incurring a 2% 'fee'. You can avoid this by having your borrowed funds readily available or by being able to wait for the stablecoin to return to its target peg.
The borrowing fee is added to the debt of the Trove and is given by a baseRate. The fee rate is confined to a range between 0.5% and 7.5% and is multiplied by the amount of liquidity drawn by the borrower.
For example using USRE: The borrowing fee stands at 0.5% and the borrower wants to receive 4,000 USRE to their wallet. Being charged a borrowing fee of 20 USRE, the borrower will incur a debt of 3,780 USRE after the Liquidation Reserve ($200 in this case) and issuance (borrowing) fee are subtracted.
Loans issued by the protocol do not have a repayment schedule. You can leave your Trove open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.
This is the ratio between the Dollar value of the collateral in your Trove and its debt in stablecoins. The collateral ratio of your Trove will fluctuate over time as the price of the native blockchain token and the stablecoin changes. You can influence the ratio by adjusting your Trove’s collateral and/or debt — i.e. adding more collateral or paying off some of your debt.
For example using USDL: Let’s say the current price of ETH is $2,000 and you decide to deposit 2 ETH ($4,000 USD worth). If you borrow 1,000 USDL (at $1 per USDL), then the collateral ratio for your Trove would be 400%.
(2ETH * $2,000) / (1,000 USDL * $1) * 100% = 400%
If you instead took out 2,500 USDL that would put your ratio at 160%.
The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode). This is a protocol parameter that is set to 110%. So if your Trove has a debt 10,000 stablecoins, you would need at least $11,000 worth of collateral to avoid being liquidated.
You lose your collateral as your debt is paid off through liquidation, i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% * 10 / 110) of your collateral’s Dollar value.
When you open a Trove and draw a loan, 200 stablecoins (10 stablecoins on BSC) is set aside as a way to compensate gas costs for the transaction sender in the event your Trove is liquidated. The Liquidation Reserve is fully refundable if your Trove is not liquidated, and is given back to you when you close your Trove by repaying your debt.
The Liquidation Reserve counts as debt and is taken into account for the calculation of a Trove's collateral ratio, slightly increasing the actual collateral requirements.
When stablecoins are redeemed, the collateral provided to the redeemer is allocated from the Trove(s) with the lowest collateral ratio (even if it is above 110%). If at the time of redemption, you have the Trove with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly as well.
The USD value by which your collateral is reduced corresponds to the nominal stablecoin amount by which your Trove’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected Troves, making them less risky.
Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off a Trove’s debt are called full redemptions. In such a case, your Trove is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.
Here's an example using USDL on ETH:
Let’s say you own a Trove with 2 ETH collateralized and a debt of 3,200 USDL. The current price of ETH is $2,000. This puts your collateral ratio (CR) at 125% (= 100% (2 * 2,000) / 3,200). Let’s imagine this is the lowest CR in the Liquity system and look at two examples of a partial redemption and a full redemption:
Example of a partial redemption
Somebody redeems 1,200 USDL for 0.6 ETH and thus repays 1,200 USDL of your debt, reducing it from 3,200 USDL to 2,000 USDL. In return, 0.6 ETH, worth $1,200, is transferred from your Trove to the redeemer. Your collateral goes down from 2 to 1.4 ETH, while your collateral ratio goes up from 125% to 140% (= 100% (1.4 2,000) / 2,000).
Example of a full redemption
Somebody redeems 6,000 USDL for 3 ETH. Given that the redeemed amount is larger than your debt minus 200 USDL set aside as a Liquidation Reserve (10 USDL on BSC), your debt of 3,200 USDL is entirely cleared and your collateral gets reduced by $3,000 of ETH, leaving you with a collateral of 0.5 ETH (= 2 - (3,000 / 2,000)).
By making liquidation instantaneous and more efficient, the stablecoins need less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.
You can sell the borrowed stablecoins on the market for the native blockchain token and use it to top up the collateral of your Trove. That allows you to draw and sell more stablecoins, and by repeating the process you can reach the desired leverage ratio.
Assuming perfect price stability (Stablecoin = 100% Target Peg), the maximum achievable leverage ratio is 11x. It is given by the formula:
maximum leverage ratio = (MCR) / (MCR-100%) where MCR is the Minimum Collateral Ratio.
If Troves are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.