Borrowing
When you sell your assets it means closing your position on that specific asset. If you have long term crypto holdings and are bullish on the asset, you would be giving up the potential value appreciation. With borrowing you are accessing liquidity (working capital) without selling your long term crypto-asset holdings. Majority of borrowing observed in existing liquidity protocols stems from crypto startups covering their operating expenses and users leveraging their holdings.
Borrowing is enabled once you supply any supported asset (Supply Markets section) to be used as collateral (more details can be found in the Supplying & Earning FAQ). Once complete, browse over to the Borrow Markets section and click on “Borrow” for the asset you want to open a new loan in. Set the amount you want to borrow based on your supplied assets that would be used as a collateral backing for the loan.
The maximum amount you can borrow depends on your supplied asset(s), the amount you have supplied and the Market’s available liquidity. The protocol does not allow you to borrow an asset if there is not enough liquidity in the Market or if your loan position(s) borrow limit does not allow you to. The Market details section on the website will include a page for every collateral asset available highlighting its individual borrowing parameters used to manage risk.
You repay your loan in the same asset you borrowed. For example, if you borrow 100 ADA you will pay back 100 ADA + interest accrued.
The interest rate you would pay on the loan(s) is based on the borrowing rate which is calculated from the supply and demand ratio (called the Utilization Rate) of the asset. Additionally you must consider the interest rate of a variable rate loan changes constantly as supply and borrow actions are executed in a Market, impacting the total you would pay in interest. In the Dashboard section of the app your current borrowing rate will be displayed in the Borrow Markets section of your dashboard.
The borrow limit (called Account Liquidity) is the USD value you could borrow before your position reaches liquidation. If your borrowing to collateral balances, the Loan to Value [LTV] ratio) experience a shortfall (negative liquidity) you are subject to liquidation, and can’t withdraw or borrow assets until Account Liquidity is positive again.
For each Market you supply assets into, your supplied balance is multiplied by the Market’s collateral factor, and added; borrow balances are then subtracted, to equal Account Liquidity. Supplying an asset into a Market or repaying your loan increases Account Liquidity; for supplied assets each USD multiplied by the collateral factor for repaying the loan each USD repaid increases Account Liquidity. Borrowing an asset decreases Account Liquidity for each USD borrowed; withdrawing an asset reduces Account Liquidity by the asset’s collateral factor times each USD withdrawn.
A Market's collateral factor can range from 0-90%, and determines the commensurate increase in liquidity (borrow limit) that a user receives by minting the qToken.
Typically, high Market Cap or liquid assets have high collateral factors and low Market Cap or illiquid assets have low collateral factors. This is done to protect liquidity protocols from backing a large percent of liabilities with illiquid assets marked by increased volatility. If a Market has a 0% collateral factor, the asset can't be used as collateral (or seized in liquidation), while it can still be borrowed.
Collateral factors can be updated through community governance in the Liqwid DAO, to adapt to changing market conditions.
Depending on the value change of your supplied and borrowed assets, the borrow limit will increase or decrease. If your borrow limit increases, it will improve your loan position by making the liquidation threshold more unlikely to be reached. In the event that the balance of your collateralized (supplied) assets compared to the borrowed assets decreases instead, the borrow limit is also reduced, increasing the likelihood of reaching the liquidation threshold.
Borrow positions are perpetual in Liqwid meaning there is no fixed time period where you must repay the loan. If your position is secure (Account Liquidity> 0), you can borrow for as long of a time period as you want. You must consider as time passes, the accrued interest on your loan will increase causing your borrow limit to decrease, which could result in increasing the likelihood of reaching the liquidation threshold.
In order to repay the loan you navigate to your open positions right above the Borrow Markets section of your dashboard and click the "Repay" button for the asset you borrowed from the protocol and want to repay. Select the amount to pay back and confirm the transaction.
Maintaining conservative borrow limit levels helps avoid the reduction of your Account Liquidity to the threshold that would trigger liquidations, you can do this by repaying the loan or supplying more assets in order to increase your borrow limit. Of these two available options to safely manage your borrow position, repaying the loan would increase your borrow limit more (since each USD repaid increases your borrow limit 1:1 but each USD supplied increases your borrow limit 1 USD x the collateral factor of the asset).
If you still have any questions on the protocol design or mechanisms, please reach out to the Liqwid team in the official Discord.
Last modified 10mo ago