Lending Market
Lend your token to earn lending reward or borrow tokens for your needs
Nusa Lending Market is a system of smart contracts that enables borrowers to take loans and lenders to offer loans by locking their crypto assets in the protocol.
Unlike conventional loans with a fixed interest rate, the Interest rate in the Floating Lending Market is uniquely determined by the supply and demand of each crypto asset. The mining of each block leads to the generation of interest rates.
Furthermore, borrowers can enjoy the flexibility to pay back their loans anytime as lenders also have the same privilege in withdrawing their locked assets.
How It Works?
When you interact with a specific market and put your crypto in the supply, you would get an equivalent amount of cTokens as a representation of the user’s funds in the blockchain. Users can choose to redeem their cTokens for normal tokens alongside the interest earned.
It is also important to note that every asset has a specific market, and the supply and demand of the asset in the market play a crucial role in determining the interest rates.
Here is an example of Floating Lending Market usage:
Alex deposits crypto in Nusa by enabling a specific crypto market, let's say IDRX. Once he puts his IDRX in the protocol, his IDRX will be available to be borrowed by other users. In return, he will get cTokens of IDRX while his IDRX is available in the Lending market, and he will earn interest. Now, Alex can sit back and enjoy earning interest as a reward.
In another case, Sabrina also deposits her assets and follows the exact steps that Alex did. Aside from earning interest rewards, she turns out to be planning other things. Sabrina wants to make her deposit as collateral for loans. For example, Sabrina deposits $1,000 worth of BNB and wants to borrow IDRX. The collateral factor* of BNB is 60%, so she could only borrow $600 worth of BNB maximum. Let's say today she only wants to borrow $500 worth of IDRX and use it for other purposes.
Time flies, and Sabrina wants to get her collateral back. In order to reclaim her $1000 worth of BNB, she needs to repay $500 worth of IDRX that she borrowed, and additional of borrow rate (in the form of borrowed token, IDRX). This borrow rate that is paid by Sabrina is where the interest that Alex received came from.
To redeem Alex's and Sabrina's deposits in the market and their interest, they will have to send their cTokens that they received when depositing their crypto.
Why Lending and Borrowing?
In terms of the crypto lending market, we can easily answer what the benefit is by lending out your crypto is that you just deposit your tokens and gain interest. But why do people borrow crypto? Especially when you have to collateralize other crypto first, that mathematically has more value than how much you borrow. The idea of borrowing crypto is that you don't want to sell your current crypto but need funds.
Willy bought 1.000 BNB at a good price 5 months ago and is planning to make a long-term investment in BNB because he believes in its prospects. As time goes on, something unexpected happens, and now he needs a fast loan of $500. Willy has 2 options:
Cash out his 1000 BNB, or
Collateralized his 1.000 BNB to make a $500 loan. In a few days, he is able to get his BNB back by paying $500 + a low borrowing fee
Borrowing crypto becomes the best option for Willy because he doesn't need to sell out his investment and lose the asset that he bought at a good price.
What People Do in the Lending Market
Lender
Supplies tokens to the market for borrowers and expects interest in return
Borrower
Supply to the market and pawn them as collateral
Borrow crypto for various activities such as getting funds for trading spot/futures/derivatives, joining staking/events, paying short-term expenses, etc
Paying their debts and interest to avoid their collateral from being liquidated
Liqiudator
Pay the borrower's debt that exceeds the borrowing limit at a discounted price
What is the risk of the Lending Market?
If you’re taking out a loan, here’s what you need to know about liquidation. If the value of your loan exceeds your Borrow Limit, your collateral will be underwater. Underwater puts your collateral to being available for liquidation. The liquidator could buy your collateral to pay your debts at a discounted price.
Safe = Borrowed Value in a good position where your loan is free to use without time limitation
Underwater = Borrowed value is in an unhealthy position where your collateral is available for liquidation
Case Examples
Case 1
1000
500
0.75
750
+250
Safe
Case 2
🔻600
500
0.75
450
-150
Underwater
Case 3
1000
🔺850
0.75
750
-100
Underwater
*collateral factor depends on each crypto market
Case 1
Your borrowing is in a safe state where your collateral won't be liquidated. You are free to use your borrowed asset as long as you want, and there is no time limitation to repay your debts.
Case 2
There is a decrease in collateral value that causes your borrowing value to reach the borrowing limit. Your collateral is underwater, where your 600 collateral could be liquidated to pay your 500 borrowed asset. The liquidator can buy your collateral by paying your debt with a 10% discount.
Case 3
There is an increase in borrowed value (does not apply in a fixed-rate market) that causes your borrowed value to reach the borrowed limit. Your collateral is in the underwater state, where your 1000 collateral could be liquidated to pay your 850 borrowed asset. The liquidator can buy your collateral by paying your debt at a 10% discounted price.
The collateral factor is an indicator of the limit on how much value you can borrow. Collateral factor isn't the only portion of collateral that will be liquidated. If you exceed the limit, the liquidation will be triggered, and 100% of your collateral might be liquidated.
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