Borrowing

What is the advantage of borrowing instead of selling my assets?

When you sell your assets you close out your position on that specific asset. If you have long term crypto holdings or are long on the asset, you would forfeit all potential value appreciation. When you instead borrow you are able to access liquidity without selling your assets. Most users complete borrows to access working capital and leverage their holdings.

How do I borrow?

Borrowing is enabled once you supply any supported asset (instructions for supplying assets outlined in the Liqwid App User Guide) allowed to be used as collateral. Once complete, browse to the Assets to Borrow section and click on “Borrow” for the asset you want to initiate a loan in. Select the amount you want to borrow and the collateral distribution for the position. You can always update your loan position's collateral distribution after opening a new loan.

How much can I borrow?

The maximum amount you can borrow depends on the total value of your supplied asset(s), and the Borrow market’s current liquidity. You can't borrow an asset if the current liquidity is less than the amount you want to borrow from the market. Similarly if your loan's health factor is too low you won't be able to complete the borrow transaction. You can review each asset supported as collateral on Liqwid v1 and its specific risk parameters for borrowing in the Liqwid Governance forum's New Markets section.

What asset do I need to repay?

You must repay your full loan in the asset you borrowed. For example, if you borrow 100 ADA you will pay back 100 ADA + interest accrued when you repay the loan.

Can I borrow at a stable interest rate?

No, Liqwid v1 only supports variable rate borrowing. The variable rate is the interest rate based on the supplied asset to borrow demand in a Liqwid market.

How much would I pay in interest?

The interest rate you pay on your loan(s) is based on the borrowing rate which is calculated from the current supply and demand ratio of the borrowed asset (called Market Utilization). Additionally the variable rates update continuously as supply and borrow actions are processed in a market, impacting the total you would pay in interest. In the Dashboard section of the app the current borrowing rate for each market will be displayed in the Assets to Borrow section.

What is the health factor?

The health factor is a number which calculates the safety of your collateral assets compared to your borrowed assets based on USD value. A larger health factor represents a safer loan, your collateral assets are more secure from a liquidation event the higher your health factor is. If your loan's health factor goes to 1 or below, the liquidation of your collateral assets will be enabled. For a health factor of 2, the collateral USD value can reduce by 50% against the borrow USD value. Your loan's health factor is based on the liquidation threshold of your collateral assets and the collateral USD value versus the USD value of your borrowed assets. You can find all of the collateral parameters in the Liqwid Governance forum's New Markets section.

What happens if my health factor is reduced?

Based on the change in USD value for your supplied assets against the change in USD value for your borrowed assets, your loan's health factor will move up or down. If your loan's health factor increases, it will improve your collateral asset's safety by moving the liquidation threshold further out from being triggered. If the USD value of your collateral assets decrease versus the USD value of your borrowed, your loan's health factor is also decreased, this would reduce your collateral asset's safety by increasing the risk of reaching the liquidation threshold.

What is the collateral factor?

A market's collateral factor can range from 0-90%, and determines the liquidity that a user receives against their qToken collateral.

Typically, high market cap or liquid assets have higher collateral factors and low market cap or illiquid assets have lower 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 on-chain community governance votes in the Liqwid DAO, to adapt to changing market conditions.

When do I need to repay my borrowed assets?

Borrow positions are perpetual in Liqwid meaning there is no fixed time period where you must repay the loan. If your position is secure (health factor > 1), you can borrow for as long of a time period as you want. The accrued interest on your loan will increase over time causing your remaining borrowable amount to decrease. This could result in increasing the possibility of reaching the liquidation threshold.

How do I repay my loan?

To repay your loan browse to your open positions in the "Your borrows" section of the dashboard and click the "Repay" button for the asset you borrowed and want to repay. Select the amount to repay and confirm the transaction in your connected wallet.

How do I avoid liquidation?

Maintaining a strong health factor (above 2) helps avoid risk of reaching the liquidation threshold that would trigger a collateral liquidations. You can do this by repaying your loan or depositing more collateral assets in your loan position to increase your health factor. Of these two available options to safely manage your borrow position, repaying the loan would increase your health factor more (since each USD repaid increases your health factor 1:1 but each USD supplied increases your health factor 1 USD x the collateral factor of the asset).

Borrowing questions

If you still have any questions on the protocol design or mechanisms related to borrowing, please reach out to the Liqwid team in the official Discord.