🏦Borrow Feature
The borrow feature, also called Shade Lend, allows you to borrow the Silk stablecoin by putting up other assets as collateral (depositing them into "Vaults"). You can also lend out your crypto assets to others who want to borrow Silk, and earn interest on your deposits.
There is a whitelist of tokens that the protocol will accept as collateral. Each whitelisted token has an isolated deposit pool known as a Vault. The isolated deposit pools means that price movement in one of your Vaults will not impact the loans you have in other Vaults. In other words, you are allowed to take out multiple loans at once, but each loan can only be collateralized by a single token. Each Vault has rules like interest rates, one-time fees for borrowing, maximum allowed loan sizes compared to collateral value, and discounts for selling the collateral if a loan can't be paid back. These rules help keep Silk stable.
If the value of your collateral drops too low compared to your Silk loan, your collateral may get sold at a discount to pay back the loan. This forced liquidation removes Silk from circulation to match the lower collateral value backing it.
Borrowing Silk provides liquidity while you keep exposure to your original crypto. Lending assets out earns you interest. Overall, Shade Lend lets you get yield from your crypto while maintaining Silk's peg through overcollateralization.
Minting Silk:
There are two ways to get Silk.
Swap assets for Silk on ShadeSwap.
Mint Silk.
Minting is the act of new Silk being created by depositing acceptable collateral into a minting vault - which is under the Earn feature under the Borrowing page.
How are Borrowing fees adjusted:
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.
Adjustable Interest Rates on Shade Lend:
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.
Understanding Vault Risk Parameters:
Interest Rate: Annual interest rate charged on your loan. This value is listed as APR, not APY, and is approximately continuously compounded. Every time a user interacts with a Vault, the interest for all positions is compounded at the same time. Interest rates can be changed once per 7 days, and they can move by a maximum of 1% in either direction. Interest rates cannot be negative. Interest rates are controlled by the protocol.
Borrowing Fee: A one-time fee assessed when you open your loan. Each Vault has a base borrowing fee, and there is an additional global borrowing fee that is based on the ratio of supply and demand for SILK. The exact mechanics of this will be explored in the Fees and Risks section of the documentation. Base borrowing fees for each vault can be changed once per 7 days, and they can move by a maximum of 1% in either direction. Borrowing fees cannot be negative. Borrowing fees are controlled by the protocol.
Mint Cap: This is the maximum amount of SILK that can be borrowed from this Vault. This mechanism prevents SILK from being backed too heavily by a single form of collateral. This value is for the entire Vault -- a cap of 2,000,000 SILK means the sum of all loans from this Vault cannot exceed 2,000,000. It does not mean that each individual loan is capped at 2,000,000 SILK. Mint Caps can be raised and lowered by the protocol, but the Mint Cap can never be reduced below 0.
Max LTV: This is the maximum loan-to-value ratio that the Vault allows for a loan. The more volatile the price of a collateral is, the lower the Max LTV will be. Positions that are above the Max LTV are marked for liquidation, which will be described below. Upon liquidation your loan will be repaid by external users and your collateral will be sold to them at a discount as compensation. Max LTVs can be changed by the protocol. Max LTV cannot ever be decreased on an existing Vault. This prevents the protocol from silently forcing liquidations on existing borrowers. Max LTVs can only ever be increased. If a Max LTV would ever have to be decreased, the Vault would be Deprecated, preventing new borrowing activity, and a new Vault would be created with the new Max LTV.
Liquidation Discount: This is the percent discount that collateral is sold at when a position is liquidated. For example, if a SILK loan in an sSCRT vault is being liquidated and the price of sSCRT is $1, and the Liquidation Discount for that vault is 10%, then liquidators will be allowed to use SILK to purchase the borrower's sSCRT as $0.90. This is an incentive for liquidators to liquidate at-risk positions before they are underwater. The Liquidation Discount can be changed by the protocol at any time.
Taking out a loan on Shade Lend
When a loan is taken out, the price of SILK is determined by the peg of SILK, not the current market price. This means that if the market price is above the peg, then it is profitable to take out a loan and immediately sell the SILK. This increases the supply of SILK and brings the price back down to the peg. Check out the tutorial here.
Repaying a loan from Shade Lend
When a loan is repaid, the price of SILK is determined by the peg of SILK, not the current market price. This means that if the market price is below the peg, then it is profitable to purchase the cheap SILK and repay your loan at a discount. This decreases the supply of SILK and brings the price back up to the peg. Check out the tutorial here.
Information provided in this post is for general informational purposes only and does not constitute formal investment advice. Please read the full disclaimer at shadeprotocol.io/disclaimer before relying on any information herein.
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