Why would I use Liquid Loans for borrowing?

The protocol offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan).

Instead of selling PLS to have liquid funds, you can use the protocol to lock up your PLS, borrow against the collateral to withdraw USDL, and then repay your loan at a future date.

What do you mean by collateral?

Collateral is any asset which a borrower must provide to take out a loan. PLS is the collateral used on Liquid Loans.

This collateral ensures any loans issued in USDL by the protocol is fully redeemable against the PLS used as the collateral. This ensures the protocol’s stability and solvency.

Is PLS (PulseChain coin) the only collateral accepted?

Yes, PLS is the only collateral type accepted by the protocol.

How can the protocol offer interest-free borrowing?

The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the amount being redeemed and last redemption time.

For example, if more redemptions are happening than usual (which means USDL is likely trading at less than 1 USD), the borrowing fee would increase, discouraging borrowing.

Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, the protocol instead opts for a fully decentralized and direct feedback mechanism via one-off fees. This completely avoids third party intervention and counter-party risk.

How can I borrow with Liquid Loans?

To borrow you must open a Vault and deposit a certain amount of collateral (PLS) into it. You can then draw USDL up to a collateral ratio of 110%.

The minimum amount that can be drawn is 2,000 USDL.

What is a Vault?

A Vault is where you take out and maintain your loan. Each Vault is linked to a PLS wallet address and each address can have just one Vault. If you are familiar with Collateralized Debt Positions (CDPs) from other platforms, Vaults are similar in concept.

Vaults maintain two balances: one is an asset (PLS) acting as collateral, and the other is a debt denominated in USDL. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Vault’s collateral ratio changes accordingly.

You can close your Vault at any time by fully paying off your debt.

Do I have to pay fees as a borrower?

Every time you draw USDL from your Vault, a one-off borrowing fee is charged on the drawn amount and added to your debt.

Note that the borrowing fee is variable and determined algorithmically, and has a minimum value of 0.5% under normal operation. The fee is 0% during Recovery Mode.

A 200 USDL Liquidation Reserve will be applied as well, but returned to you upon repayment of debt.

How is the borrowing fee calculated?

The borrowing fee is added to the debt of the Vault. The fee rate is confined to a range between 0.5% and 5%, and is multiplied by the amount of liquidity drawn by the borrower.

For example: The borrowing fee stands at 0.5% and the borrower draws 4,000 USDL from his open Vault. The borrower will obtain 3,781 USDL after the Liquidation Reserve and issuance fee are deducted. The borrowing fee is calculated on the borrowed amount less the Liquidation Reserve.

When do I need to pay my loan back?

Loans issued by the protocol do not have a repayment schedule. You can leave your Vault open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.

What is the collateral ratio?

This is the ratio between the US Dollar value of the collateral in your Vault and its debt in USDL.

The collateral ratio of your Vault will fluctuate over time as the price of PLS changes. You can influence the ratio by adjusting your Vault’s collateral and/or debt, i.e. adding more PLS collateral or paying off some of your debt.

For example: Let’s say the current price of PLS is $0.01 and you decide to deposit 3,000,000 PLS. If you borrow 10,000 USDL, then the collateral ratio for your Vault would be 300%.

If you instead took out 25,000 USDL that would put your ratio at 120%.

The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode).

This is a protocol parameter that is set to 110%, so if your Vault has a debt of 10,000 USDL, you would need at least $11,000 worth of PLS value deposited as collateral to avoid being liquidated.

To avoid liquidation during Recovery Mode, it is recommended to keep the ratio comfortably above 150% (e.g. 200% or, better yet, 500+%).

What happens if my Vault is liquidated?

You lose your collateral as your debt is paid off through liquidation via the Stability Pool (borrower redistribution in rare circumstances), i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% * 10 / 110) of your collateral’s Dollar value.

What is the Liquidation Reserve?

When you open a Vault and draw a loan, 200 USDL is set aside as a way to compensate gas costs for the transaction sender in the event your Vault is liquidated.

The Liquidation Reserve is fully refundable if your Vault is not liquidated, and is credited to you while you close your Vault by repaying your debt.

The Liquidation Reserve counts as debt and is taken into account for the calculation of a Vault's collateral ratio, slightly increasing the actual collateral requirements.

Do I lose the 200 USDL if my Vault is liquidated?

Yes, if your Vault is liquidated you will lose the 200 USDL gas reserve. This is higher than gas fees on PulseChain because the contract will run forever and gas fees may increase over time, as we’ve seen with Ethereum. This reserve is compensation to those spending the time executing the liquidation transactions.

What happens if my Vault is redeemed against?

When USDL is redeemed, the PLS provided to the redeemer is allocated from the Vault(s) with the lowest collateral ratio (even if it is above 110%). If, at the time of redemption, you have the Vault with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.

The USD value by which your PLS collateral is reduced corresponds to the nominal USDL amount by which your Vault’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral.

As a positive side effect, redemptions improve the collateral ratio of the affected Vaults, making them less risky.

Redemptions that do not reduce your debt to 0 are called ‘partial redemptions’, while redemptions that fully pay off a Vault’s debt are called ‘full redemptions’. In such a case, your Vault is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.

Let’s say you own a Vault with 2,000,000 PLS collateralized and a debt of 3,200 USDL. The current price of PLS is $0.002. This puts your collateral ratio (CR) at 125% (= 100% * (2,000,000 * .002) / 3,200).

Let’s imagine this is the lowest CR in the Liquid Loans system and look at two examples of a partial redemption and a full redemption:

Example of a partial redemption

  • Somebody redeems 1,200 USDL for 600,000 PLS and thus repays 1,200 USDL of your debt, reducing it from 3,200 USDL to 2,000 USDL. In return, 600,000 PLS, worth $1,200, is transferred from your Vault to the redeemer. Your collateral goes down from 2,000,000 to 1,400,000 PLS, while your collateral ratio goes up from 125% to 140% (= 100% * (1,400,000 * .002) / 2,000).

Example of a full redemption

  • Somebody redeems 6,000 USDL for 3,000,000 PLS. Given that the redeemed amount is larger than your debt minus 200 USDL (set aside as a Liquidation Reserve), your debt of 3,200 USDL is entirely cleared and your collateral gets reduced by $3,000 of PLS, leaving you with a collateral of 500,000 PLS (= 4,000 - 3,000 / .002).

How can you offer a collateral ratio as low as 110%?

By making liquidation instantaneous and more efficient, the protocol needs less collateral to provide the same guarantee level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.

Why did the collateral and debt of my Vault increase without my intervention?

If Vaults are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.

Are there notifications to inform the user about collateralization levels prior to borrowing?

Yes. Information will be displayed on what the minimum collateralization level is, and how to effectively reduce the risk of liquidation.

The system also displays the Total Collateral Level at any point in time.

As long as your individual collateral level remains above 150% your collateral is safe from liquidation, even during recovery mode.

How are Vaults sorted and ordered?

Liquid Loans relies on a particular data structure: a sorted, doubly-linked list of Vaults that remains ordered by individual collateralization ratio (ICR), i.e. the amount of collateral in USD value of PLS divided by the amount of debt in USDL.

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