Detailed explanation of THORChain's new protocol Lending: How to realize no-clearing lending?

Original Source: THORChain Blog

Original compilation: 0x 711, BlockBeats

The decentralized cross-chain transaction protocol THORChain has launched its lending protocol Lending today. The official claimed that the loan agreement has "no interest, no mandatory liquidation, and no maturity date." How the Lending protocol achieves the above functions, the THORChain team explained the new protocol in detail in the official blog, and BlockBeats compiled and translated it as follows.

THORChain has activated the lending function. Users can lend native Layer 1 assets - BTC and ETH to THORChain, and borrow a USD-denominated debt with no liquidation, no interest, and no maturity date.

Loan terms:

no interest

No mandatory liquidation

no expiration date

Loans are issued at a collateralization ratio (CR), which determines the ratio of debt a borrower receives to its collateral. CR can be between 200% and 500%, depending on market conditions.

The debt is denominated in TOR, which is the dollar-equivalent stablecoin. Debt can be repaid with any THORChain-backed asset, including stablecoins.

The minimum loan term is 30 days. Borrowers can repay the debt and repossess their collateral anytime after 30 days. Partial repayments are allowed, but the collateral will not be released until the debt is fully paid.

At this stage, Lending will support ETH and BTC as collateral. In the future, Lending will be open to all Layer 1 assets supported by THORChain (BNB, BCH, LTC, ATOM, AVAX, DOGE).

Where to open, close and manage loans:

THORSwap

Lends

Dashboard

THORChain.net Dashboard

Nine Realms Lending Dashboard

This will be incrementally added as more interfaces and dashboards are added.

Learn about Lending Design

Design goals:

The main design goals of lending are to:

1. Minimal Cognitive Load - Pursue the simplest user experience for collateral, debt and loan terms.

2. Scalable Security - Collateral should always be secured.

3. Managed risk - The risk of new debt being created too quickly should be limited, and the risk of existing debt exceeding system liquidity should be limited through transparent circuit breakers.

Basic instructions:

THORChain issues USD-denominated debt using Layer 1 asset collateral, holding the collateral as equity. The more collateral there is relative to the depth of the pool, the higher the collateralization rate. The higher the mortgage rate, the safer the system. Since there is no liquidation or interest, users have no incentive to repay their loans, which increases the stake value of the protocol. By removing RUNE for loans from the pool, THORChain can increase its Total Value Locked (TVL), enhancing liquidity and security.

Community Resources:

In addition to lending documentation, the THORChain community has created numerous resources to better understand the mechanics behind the lending protocol and its risks. Some aspects of the design have been adjusted since the initial proposal in September 2022 - please be aware of old sources as they may refer to an outdated design.

Internal Price Oracle - TOR Stablecoin

THORChain does not use any third-party pricing data and does not rely on any third parties. In order not to rely on any external stablecoin pricing unit, the dollar-equivalent stablecoin named "TOR" will be used as the internal pricing tool of the lending agreement.

TOR cannot currently be held or traded. Its market cap is 0. It is used only as a denomination instrument for debt in lending agreements. The price of TOR comes from the median price of all stablecoins on THORChain, such as USDC, USDT, BUSD, LUSD, GUSD, USDP, DAI, etc. Even if one or more stablecoins lose or crash, TOR remains correctly priced, requiring only a pool of available stablecoins to remain correctly priced.

To prevent protocol manipulation, the depth of the TOR virtual pool varies with volatility. When the stablecoin fluctuates, TOR will remain properly priced, but its virtual pool depth will shrink to protect THORChain, which means that if a borrower tries to open or close a loan, the slippage will be very large. For best results, users are advised to open and close loans when THORChain is less volatile.

Safely expand lending scale - loan cap

The loan limit is based on the real-time RUNE supply, which has a hard limit of 500 million RUNE. However, about 15 million RUNEs have been burned because BEP-2 or ERC-20 RUNE assets have not been upgraded. This shortfall provides a cushion for initial borrowing. To ensure safe expansion, only 1/3 of burned RUNE (approximately 5 million) can be used for loans. This ensures that the hard limit of 500 million is not breached if RUNE's price depreciates by 3 times relative to its liabilities and all outstanding loans are repaid. As more RUNE are burned and the gap grows, more loans can be created. RUNE is burned when loans are opened/closed under favorable conditions, so the (actual supply vs theoretical total supply) gap should keep increasing.

risk

Block Science conducted a comprehensive report on the risks of the THORChain lending protocol and conducted economic simulations. Block Science also made recommendations for initial lending parameters to provide a safe experience for users and the protocol itself.

risk report

economic simulation

cadCAD simulation framework

The team and community have gone to great lengths to ensure the security of the lending protocol for borrowers and the protocol itself. The team and community are committed to delivering a revolutionary lending product without compromising the protocol, over-leveraging, or taking unfair risks.

Protection Against Inflation - Circuit Breaker

If the price of RUNE drops sharply against most of its collateral assets (BTC, ETH), net inflation of RUNE may occur when users start repaying their loans and exceed the historically burned RUNE margin. This inflation may reach the issuance cap of 500 million RUNE. At this point, the system will suspend new lending and deactivate the borrowing function (note that all other functions of the TC will still function normally). At this time, RUNE will not further inflate, and the circulation is controlled. RESERVE will assume the remaining collateral payments. If the loan program has ended, a potential discharge path is outlined in the ADR. The relevant panel will monitor the above situation.

Why no interest, no liquidation and no maturity date?

At first glance, providing these features might seem like a lot of risk to the protocol. However, it needs to be understood that the collateral for the loan is held as equity (RUNE IOU), the debt is fully repaid (cashed into stablecoins) when issued, and ideally the loan is never repaid. Demand for borrowing drives up collateralization ratios, which increases the ratio of equity stored to debt issued. Borrowers then incur the fair value opportunity cost of the mortgage rate to limit the demand for borrowing. Therefore, the protocol hopes to convert as much exogenous capital as possible into equity, which is provided by the market.

Frequently Asked Questions

Can I partially repay the loan?

Partial repayments of the debt can be made, but the borrower cannot repossess the collateral until the debt is fully paid off.

What if I overpay my debt?

The overpayment will be credited to the borrower's next loan opening.

Is there a best time to open or close a loan?

Yes, the best time to start and close a loan is when volatility is low. To protect the network from price manipulation, virtual pools shrink in depth when volatility increases, which means liquidity fees can increase significantly. Managing loans when THORChain volatility is low will yield optimal results. Patient borrowers pay the least.

Will I always get my full collateral back?

Users can get back the full amount of collateral when they repay their debts, minus the slippage-based liquidity fees incurred during the process of opening and closing loans. During times of lower volatility, fees are lower. During times of high volatility, fees will be higher due to deep shrinkage of the virtual pool. Patient borrowers pay the least.

When will more collateral options be available?

The lending protocol initially supports BTC and ETH. The loan function that supports all Layer 1 assets on THORChain is already available, and only needs the verifier to open it through mimir.

What assets can I use to pay off my debts?

Debt can be repaid with any asset backed by THORChain. The assets used to pay off the debt will be sold for TOR to pay off the debt, because the debt is denominated in TOR.

Will lending use streaming swaps?

There are currently no plans to use streaming swaps in the lending protocol.

Why is there no liquidation?

In this design, if the collateral is less than the debt value, this is not a problem, because the collateral (stored as RUNE equity) is the liability. Liabilities only grow when RUNE- asset prices fall and loans are repaid. Liquidating collateral would risk a single loan, hurt user experience, and make users monitor the price of RUNE, contradicting design goals. Instead of liquidating, the protocol could afford to increase the RUNE supply slightly (about 15 million or 3%) and then activate the circuit breaker, suspending the lending function. Shock exits are less likely as RESERVE assumes the remaining collateral payments and loan terms remain unchanged after the circuit breaker.

Why no interest?

Interest rates generate income on collateral, but make it more likely that users will repay their loans. THORChain's design works best when the user chooses to take a long-term loan or never repay the loan. The attractive 0% interest rate means that users rarely pay back their loans because the principal remains the same. Users pay a slippage-based fee when entering or exiting a position, which increases network participants' earnings and burns RUNE forever.

Why is there no expiration date?

The protocol hopes to attract as much exogenous capital as possible (like L1 assets like BTC and ETH) as it converts it into equity (RUNE IOU). For example, $1 billion in collateral in storage means buying $1 billion of RUNE, minus the collateralization ratio (if totaled 300%) the amount of RUNE sold (approximately $300 million), for a total net buying pressure of $700 million. The $700 million in storage equity is a liability, and THORChain does not want to be required to repay this liability because it has to sell RUNE. Therefore there is no expiration date.

How does Lending help THORChain expand?

THORChain has strict rules on economic security. The validator's value deposit must always be greater than the value of the asset stored in the vault, denominated in RUNE. Due to the liquidity and savers that the protocol has, the network will likely maximize the pooled RUNE and send all rewards to nodes. The protocol stops scaling until RUNE can be added to the bond module, but this will take time. The lending design buys and burns RUNE from the pool, which directly affects the relationship between liquidity and security. It nets RUNE reductions in the pool when a loan is made, allowing more TVL to come in. It also buys into RUNE, allowing increased security so the network can securely store more exogenous capital.

Who is the counterparty to the loan?

The THORChain protocol and all RUNE holders are counterparties to each loan. The RUNE burn/mint mechanism implies a RUNE enrichment/dilute effect on all RUNE holders when loans are issued and closed. Liquidity providers and savers do not lend assets directly to borrowers. The pool is just a medium for swapping between collateral and debt. Savers and liquidity providers also directly benefit from liquidity fees from these swaps.

Original link