Exploring the Feasibility of Non-Clearing Lending Agreements: Can DeFi's High Yields and Flexibility Be Achieved Simultaneously?
The non-clearing lending agreement provides a simple and effective new alternative.Title: Insightful Examination of the No-Liquidation Lending Protocol
Author: SCapital
Compiled by: Qianwen, ChainCatcher
Current lending protocols face numerous challenges, primarily because the main participants in the DeFi lending ecosystem (platforms like Aave and Compound) adopt several fundamental mechanisms:
- Over-collateralization: Borrowers are required to deposit a certain amount of assets (such as ETH) that far exceeds the amount they wish to borrow, usually deposited in the form of stablecoins.
- Interest rate volatility: Interest rates fluctuate dynamically according to supply and demand. As more borrowers utilize the available liquidity pools, interest rates often rise rapidly to encourage repayments or increase deposits.
- Collateral liquidation: If the market price of the collateral falls below a critical ratio (considering the borrowed amount and interest), the collateral will be sold to repay the user's debt.
However, this popular model has an inherent flaw — when market prices plummet sharply, it triggers a series of liquidations. This leads to rising interest rates and market panic. The recent drop in CRV is a good example. The market fears CRV liquidations, which in turn causes its price to plummet, while concerns about potential bad debts on lending platforms affect the entire DeFi industry. Borrowers' worries about sudden market downturns often lead to a decrease in capital efficiency, as they keep their savings above necessary levels to avoid liquidation. In this model, it is difficult to simultaneously meet the requirements of capital efficiency, liquidity of the pools, and effective liquidation.
Innovative Solution: No-Liquidation Lending Protocol
This new approach proposes a lending protocol that uses Ethereum as the primary collateral with predetermined terms. Its advantage lies in simplicity: Borrowers set a liquidation price when initiating a loan, and as long as they repay before the specified deadline, their collateral remains secure.
Mechanism Explanation
- Borrower's perspective: They collateralize ETH to obtain stablecoin loans (like USDC) without periodic interest, locking in a liquidation price. Therefore, even if the market price of ETH plummets below this price, the collateral is only at risk at the end of the loan.
- Lender's perspective: They provide the stablecoins needed for lending. The ETH collateralized by borrowers generates staking rewards, allowing lenders to profit. If the market price of ETH falls below the set liquidation level, they can effectively acquire ETH at the pre-agreed liquidation price.
The core of the system is the concept of stablecoin (USDC) pools. These pools have clear maturity dates and liquidation price caps. Borrowers interact with these pools to set their preferred liquidation prices (ensuring they are below the pool's cap) and then determine the amount of USDC they are eligible to borrow based on the collateral situation.
During the loan term, borrowers can repay early and retrieve their ETH. Lenders' liquidity is supported by the unborrowed USDC; if all USDC is borrowed out, they cannot withdraw early.
Let’s take two borrowers, A and B, as examples:
Borrower A offers 10 ETH as collateral and specifies a liquidation price of 1600 USDC. Based on these criteria, this borrower would be entitled to a loan of 16,000 USDC. The crux of the matter is that if the price of ETH falls to 1600 USDC, or lower at the end of the loan, the 10 ETH they deposited would be forfeited unless they choose to repay the loan early.
Borrower B follows a similar procedure but with different amounts: this borrower chooses 5 ETH as collateral and 1200 USDC as the liquidation value, which corresponds to a loan of 6000 USDC.
Strategic Advantages Compared to Traditional Systems
This protocol gives borrowers more leeway in setting liquidation prices, providing a buffer against hasty liquidations that platforms like Aave might trigger. On the other hand, lenders can enjoy potential returns higher than traditional platforms (like Aave), especially when the market price of ETH is favorable.
In-depth Comparison
Let’s assume the market price of ETH is 2000 USDC.
Using the new protocol:
When a borrower obtains 1 ETH and chooses liquidation prices of 1600 USDC, 1200 USDC, or 800 USDC, the amounts they can borrow would be 1600, 1200, or 800 USDC, respectively.
Using AAVE:
With 1 ETH as collateral, borrowing amounts of 1600 USDC, 1200 USDC, or 800 USDC would result in the system automatically setting the liquidation prices for ETH at 1927 USDC, 1445 USDC, and 963 USDC, respectively. Compared to the liquidation prices under the new protocol, these points are significantly higher, potentially exposing borrowers to greater risk.
Evaluating Returns:
Lido's stETH annual interest rate is 4.2%. If we also consider a 70% pool utilization rate and compare it with AAVE's 2.1% USDC deposit rate:
Lenders operating under the new protocol, with the aforementioned liquidation values of 1600 USDC, 1200 USDC, and 800 USDC, would expect actual returns of 4.31%, 5.53%, and 7.98%, respectively. Clearly, these returns are more lucrative than Aave's deposit rates.
In summary, compared to existing platforms like AAVE, this new protocol offers borrowers a more flexible and secure environment while providing lenders with more attractive returns.
Future Considerations for Improvement:
For lenders, potential improvements could involve real-time liquidation above previously agreed prices during active loan periods. This practice could allow lenders to acquire ETH at favorable prices but would also require borrowers to constantly monitor ETH price fluctuations.
Summary
There are several lending models popular in the DeFi space (represented by platforms like Aave and Compound) that present inherent challenges, leading to market volatility and unintended liquidations. The no-liquidation lending protocol offers a simple and effective new alternative. In this model, borrowers deposit ETH, determine their own liquidation prices, and can reclaim their collateral as long as they repay the loan before the due date. This model provides greater flexibility and potential higher returns for both borrowers and lenders.
