💡Core Concepts
Core mechanics of the borrow/lend market
1. Pairs and Lending Mechanics
In each isolated market, users can borrow one type of token (Asset Token) by depositing another (Collateral Token).
Depositing Asset Tokens in a pair gives lenders a claim that is redeemable for an increasing quantity of Asset Tokens as interest accrues.
Borrowers deposit Collateral Tokens to gain the right to borrow Asset Tokens.
2. Interest Rate Mechanics
Interest is accrued continuously according to the formula: Pe^rt-e
Interest rates are determined by a specific Rate Calculator contract for each pair. The Time-Weighted Variable Rate adjusts based on asset utilization - Rates decrease if utilization is low and increase if high.
3. Loan-To-Value (LTV)
LTV represents the ratio of borrowed assets to deposited collateral. It changes with market rates and interest accrual.
Borrowers must maintain their LTV below a pre-set Maximum LTV to avoid their position being marked unhealthy. To correct an unhealthy LTV, borrowers can add collateral or repay part of the loan.
4. Liquidations
If a borrower’s LTV exceeds the Maximum LTV, any user can liquidate the position by repaying some or all of the debt, receiving collateral plus a fixed liquidation fee in return. The liquidation fee, set at deployment, is usually 10%.
5. Vault Account Mechanics
The Vault Account is a key element in the pair's accounting system, comprising two main components: the Account Value (total tokens within the vault) and a unique representation of ownership for each lender.
The Account Value reflects the overall holdings in the vault, including both the initial deposits and any accrued interest.
Lenders receive an increased value, symbolizing their contribution to the Vault Account. This can be redeemed in proportion to their share of the total Account Value at a later date.
As interest accrues within the pair, the Account Value increases, enhancing the redeemable value of each lender's token.
Last updated