Core Concepts
Core mechanics of the borrow/lend market
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.
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.
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.
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.
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:
Account Value – The total balance within the vault, including both initial deposits and accumulated interest.
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.
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.
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