# Core Concepts

#### **1. Pairs and Lending Mechanics**

Echelon utilizes **isolated lending markets**, where users can borrow a specific **Asset Token** by depositing a different **Collateral Token** within a given pair. Each isolated market functions independently, reducing systemic risk across the protocol.

* **Lenders**: Supplying **Asset Tokens** to a pair grants lenders a **redeemable claim** on an increasing quantity of Asset Tokens as interest accrues. The lender’s balance grows over time as a result of borrower interest payments.
* **Borrowers**: To access liquidity, borrowers must deposit **Collateral Tokens**, securing the right to borrow Asset Tokens up to the Loan-to-Value (LTV) limit assigned to the pair.

This structure allows borrowers to access leverage while lenders earn passive yield from interest payments.

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#### **2. Interest Rate Mechanics**

Interest rates in Echelon are continuously **accrued** using an exponential growth formula:

Pert−eP e^{rt} - ePert−e

where:

* **P** = principal amount borrowed
* **r** = interest rate
* **t** = time elapsed

Each asset pair has its own **Rate Calculator contract**, which dynamically adjusts borrowing costs based on supply and demand:

* **Low utilization**: Interest rates decrease to incentivize borrowing.
* **High utilization**: Interest rates increase to discourage over-borrowing and encourage new lending.

The **Time-Weighted Variable Rate** ensures that interest rates respond smoothly to changing market conditions. For further details, refer to the **Interest Rate Mechanics** section in the Echelon documentation.

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#### **3. Loan-To-Value (LTV) Ratio**

The **LTV ratio** represents the proportion of borrowed assets relative to deposited collateral. It fluctuates based on market price changes and ongoing interest accrual.

* Borrowers must **maintain an LTV below the Maximum LTV** to keep their position healthy.
* If LTV **approaches the Maximum LTV**, borrowers can:
  * Deposit additional collateral to reduce their LTV.
  * Repay part of their loan to lower their outstanding debt.

Each asset pair has a **unique Maximum LTV**, reflecting the risk profile of the collateral asset. Updated LTV values for supported assets can be found in the **Supported Assets** section of the documentation.

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#### **4. Liquidations**

If a borrower's **LTV exceeds the Maximum LTV**, their position becomes subject to **liquidation** to protect lenders and protocol solvency.

* Any user can **liquidate** a borrower’s position by repaying part or all of their debt.
* In return, the liquidator **receives a portion of the borrower’s collateral** at a discount, incentivizing the liquidation process.
* A **fixed liquidation fee**, typically **10%**, applies to each liquidation event.

Liquidation ensures that undercollateralized positions do not create bad debt within the protocol.

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#### **5. Vault Account Mechanics**

The **Vault Account** is a fundamental component of Echelon’s accounting system, managing deposits, accrued interest, and lender claims. It consists of:

1. **Account Value** – The total balance within the vault, including both initial deposits and accumulated interest.
2. **Lender Ownership Representation** – Lenders receive an increased claim on the vault as interest accrues.

* **Lenders' redeemable claims grow over time** as interest accrues within a pair, increasing the total Account Value.
* When withdrawing, lenders receive a share proportional to their ownership stake in the vault.

By utilizing this vault-based system, Echelon simplifies lender accounting while ensuring accurate interest distribution.

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By integrating **isolated lending pairs, dynamic interest rates, liquidation safeguards, and an efficient vault-based accounting model**, Echelon provides a secure and flexible decentralized lending protocol tailored for various digital assets.