Overcollateralized Minting
Detailed description of bounded conversion minting.
Last updated
Detailed description of bounded conversion minting.
Last updated
Overcollateralized minting is the process of locking up 120 --> 150%+ worth of accepted volatile collateral in order to mint out SILK (a stable asset). Whenever the locked collateral falls below an acceptable loan-to-value (LTV) ratio, the locked up collateral is sold off to the secondary market in return for SILK. This SILK is then burned in order to maintain acceptable levels of system wide debt.
Shade Protocol's overcollateralized isolated risk market (i.e. Shade Lend) has the following key features and parameters:
Stability Pool
Adjustable interest rates
Adjustable borrowing rates
The stability pool is a pool of SILK used for liquidations of vulnerable positions that violate the system-wide collateralization rules. When a vault’s LTV is too high, it will be marked for liquidation. When liquidated, SILK in the stability pool will be used to repay half of the outstanding debt, and the collateral backing the loan will be distributed to the stability pool depositors at a premium that is configurable system-wide per vault. The protocol will take a small percentage of the liquidated collateral as revenue.
With overcollateralized minting on Shade Lend, liquidations will be a fair system using a stability pool. Most lending protocols in DeFi use a first-come-first-serve liquidation model which is an extremely competitive space that is completely dominated by bots. The barrier to entry is almost unachievably high, as the best liquidation bots will capture almost all liquidation value. With overcollateralized minting on Shade Lend, liquidations will be a fair system using a stability pool.
Below is an example of stability pool driven liquidations for isolated risk markets:
User has $10,000 in BTC and $5,000 in debt. Maximum LTV for this loan is 60%.
BTC drops 20% and the user’s deposited collateral is now only worth $8,000, making their LTV 62.5%.
The liquidation discount for this vault is 10%. To restore solvency, half of the user’s debt is repaid by SILK in the stability pool, so $2,500 of SILK is taken from the stability pool and burned. $2,750 ($2,500 + 10%) of BTC is taken from the borrower’s collateral.
The liquidation discount for this vault is 10%. To restore solvency, half of the user’s debt is repaid by SILK in the stability pool, so $2,500 of SILK is taken from the stability pool and burned. $2,750 ($2,500 + 10%) of BTC is taken from the borrower’s collateral. Liquidation profit is calculated at $250. If the protocol’s share of liquidation profit is 20%, then $50 of BTC is sent to the protocol treasury, and the rest of the BTC ($2,700) is sent to the stability pool depositors as a claimable reward.
In the event that the protocol’s share would make a liquidation unprofitable for depositors, the protocol’s share is instead also given to the stability pool depositors.
Interest rates per overcollateralized minting vault will be determined based on the historical volatility trends of an asset. Interest rates can be raised or lowered by the protocol to capitalize on demand. Variable interest rates will automatically adjust interest rates based on borrowing demand.
Borrowing fees are assessed when SILK is borrowed and is taken out of the borrowed SILK (e.g. if the user borrows 100 SILK with a 1% borrowing fee, they will receive 99 SILK in their wallet and have an outstanding debt of 100 SILK). The borrowing fee will be based on borrower demand (higher demand collateral = higher borrowing fees) and tail risk of the collateral (higher tail risk = higher borrowing fees). Since the borrowing fee is charged when a loan is taken out, there is no impact to existing borrowers when the borrowing fee changes.
