Relend Network
  • Introduction
    • rUSDC
      • rUSDC-stark
    • DeFi Lending
    • RELEND Units
  • Architecture
    • rUSDC Token Standard
    • rUSDC Instances
    • Local and Global Price Stability Modules
    • Relend Network Token (R)
  • rUSDC: Mechanism and Risk Disclosure
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  • Lenders and borrowers
  • Liquidations
  • Solvency invariant.
  1. Introduction

DeFi Lending

Lenders and borrowers

DeFi lending markets consist of lenders and borrowers. Lenders pool their deposit into a single pool of assets, making them available for borrowers to borrow. Borrowers can borrow from the supply pool, however they must deposit collateral which maintains a higher value than their underlying debt. Borrowers pay interest to the lenders. Typically, the interest rate is determined according to the market utilization, which is defined as the ratio between supplied liquidity and borrowed amount. This value can range between 0 (no borrowers) and 1 (all of the supply is borrowed). Higher utilization leads to higher interest rates.

Liquidations

Typically both collateral and debt assets are volatile, and can appreciate or depreciate in value. In order to make sure the collateral value is always higher than the borrower’s debt, a liquidation process is triggered whenever the market value of the collateral, multiplied by the collateral factor value 1 is lower than the market value of the debt. When a borrower’s position is subject to liquidation, anyone can repay this debt, and get all or part of the collateral in return. Liquidators are assumed to be profit driven, and thus, will only repay if the collateral value is higher than the debt.

Solvency invariant.

Lenders can only withdraw underutilized supply. When supply is fully utilized, higher interest rates incentivize borrowers to repay their debt and incentivize additional lenders to supply liquidity. Rising interest rates ensure that borrowers repay their debt, or alternatively, some borrowers will get liquidated, which in turn, results in debt repayment.

If the value of the collateral is lower than the value of the debt, then borrowers are not incentivised to repay their debt, no matter how high the interest rate is, and liquidators are not incentivized to execute liquidations. Consequently, not all lenders will be able to withdraw their deposits, and the system becomes insolvent.

Formally, for a borrower b, we denote by C(b) the market value of the borrower’s collateral, and by D(b) the value of his debt. For simplicity, we can assume that both are denominated in USD.

The basic invariant that ensures user funds are protected is:

For every borrower b: C(b) >= D(b)

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Last updated 2 months ago