Lending
The lending protocol for the platform will be similar to that of Compound, except it is specifically for trading purposes on the platform. Lending pools will be peer-to-peer unlike a traditional brokerage firm, with smart contracts and collateralization ratios mitigating counterparty risk while allowing participants to maintain self-custody of assets. Each oAsset lending pool will be represented by its own smart contract that controls interest rates paid by borrowers. The utilization ratio will properly adjust interest rates based on supply and demand, which is defined as:
Uratio=LoansAssetβ€…Value+LoansU_{ratio}=\frac{Loans}{Asset\:Value+Loans}
A utilization ratio (U_ratio) will be calculated independently for each lending pool, which can be either a stablecoin or an oAsset.
Interest rates are modeled by a set of two functions, one model for U_ratio≀U_optimal, where interest rates will gradually increase and another for U_ratio > U_optimal, where rates should rapidly increase.
Rv={UUoptimal.Rmultiple1+Rbase,U≀UoptimalUβˆ’Uoptimal1βˆ’Uoptimal.Rmultiple2+Rbase,U>Uoptimal}R_v=\begin{Bmatrix} \frac{U}{U_{optimal}}.R_{multiple1}+R_{base} & ,U\leq U_{optimal}\\ \frac{U-U_{optimal}}{1-U_{optimal}}.R_{multiple2}+R_{base} & ,U\gt U_{optimal} \end{Bmatrix}
The variable rate is designed to incentivize borrowing and lending and keep the utilization near Uoptimal. In the future, this variable interest rate could be modeled by an exponential function with a positive linear overlay, but initially we will stick with what peer-to-peer lending giants have shown to be successful.
Variable interest rate model is from Aave’s whitepaper: https://github.com/aave/aave-protocol/blob/master/docs/Aave_Protocol_Whitepaper_v1_0.pdf
Fees will be captured from the lending pool in order to build a reserve pool that will be leveraged as an insurance pool for the protocol. This pool could be utilized for preventing cascading defaults and preventing LPs (minters) from having to cover the total cost of oAssets if there are not enough long/short positions available for payout.
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