SpiritSwap Lending Network: Collateralization Explained

  • Launching Monday 23 August 2021
  • Supported currencies: SPIRIT, FTM, wETH, USDC, wBNB & wBTC.

We are pleased to announce that lending via SpiritSwap is set to launch next week!

In this article, we’ll explain in-depth how this new DeFi protocol differentiates from existing services, along with the parameters and configurations that have been put in place for its deployment.

While the SpiritSwap lending network is similar to lending networks like Compound in some respects, there is one major difference. Our partner, Ola Finance, provides the ability to create isolated instances of lending, across different networks.

Compound, Aave, and other liquidity/lending protocols are single, albeit large, instances where all assets are pooled together. This can be beneficial in terms of aggregating liquidity in one place and increasing total value locked (TVL) on one lending protocol. However, this approach is restrictive when it comes to the “type” of assets which can be added.

As explained in one of our previous article, Ola Finance solves this by providing a “Network of Lending Networks” in which multiple isolated instances are created and various smaller cap assets can be added to each.

To accommodate for tokens with lower liquidity, Ola Finance runs a “protector bot”, whose purpose is to detect price anomalies and trade against them. Protector bot funds are provided by the entity that launches the lending network, in this case, SpiritSwap. This resembles the way market makers are funded on centralized exchanges.

The SpiritSwap lending protocol launching August 23rd will be the first of many, as the SpiritSwap team plans to create new instances based on the demand of the community. This will allow various tokens to be supplied, borrowed, and used as collateral.

This new, innovative, and much more comprehensive approach to decentralized liquidity protocol, partnered with the innovative strategies that liquidity providers are able to execute, makes us very excited about what the future holds!

How it works

Like similar DeFi lending protocols, SpiritSwap Lending Network is permissionless, meaning that anyone can deposit one or more of the supported tokens into the money market, in order to earn interest.

The assets supported on both the lending and borrowing side are as follows:

  • wBTC
  • USDC
  • wETH
  • wBNB
  • FTM
Teaser of SpiritSwap Lending Network UI

When you “supply” assets, making them available as part of the “borrowing pool”, you’ll receive “oTokens” representing your share of the asset deposited in the lending pool. The tokens received in return, namely oWBTC, oWETH, oUSDC, oSPIRIT, oFTM etc. are interest-bearing assets. This is because they entitle the lender to receive both the principal they originally deposited plus a portion of the interest that borrowers pay.

The minimum amount that can be borrowed in any asset is $50.

In order to borrow on the network, you must first deposit sufficient collateral in one of the supported assets, that is in excess of the amount of the loan. This is standard practice in decentralized lending, adopted to minimize loan defaults in the absence of realistic third-party enforcement. The loan and its collateral are usually called a collateralized debt position (CDP).

The collateral factor or “c-ratio” is an important parameter that determines how much a user is allowed to borrow against a particular collateral type. The initial collateral ratios for borrowing assets on SpirtSwap’s lending network are as follows:

  • USDC — 75%
  • FTM — 70%
  • wETH — 70%
  • wBTC — 70%
  • BNB — 60
  • SPIRIT — 20%

For example

The borrower provides 1 wETH as collateral at a unit price of $2,000 (meaning a collateral amount of $2,000). In this case, $1,400 worth of any asset (70%) can be borrowed from the borrow markets (provided there is enough liquidity).

The liquidation factor determines the case in which a CDP is eligible for liquidation. Any position below this point can be liquidated. The initial liquidation factors for assets on SpiritSwap’s lending network are as follows:

  • USDC — 75%
  • FTM — 75%
  • wETH — 75%
  • wBTC — 75%
  • BNB — 70%
  • SPIRIT — 40%

For example

1 WETH = $2,000.

$1,400 worth of USDC is borrowed against 1 wETH ($2,000). When the value deposited in wETH = $1866.6666 (1400$/0.75) the CDP becomes eligible for liquidation.

Liquidation means that a third party (liquidator) repays up to half of the loan and receives the equal value of collateral plus a fee. The remainder of the loan and the collateral remain. More details on liquidator incentives can be found below, and in case you are interested, this article explains how things work behind the scenes.

⚠️ Warning! In light of the liquidation risk, borrowers need to carefully monitor their CDPs to ensure their position remains adequately collateralized and is not liquidated.

A CDP can be closed at any point by repaying the loan and the accrued interest. The interest rate for a given asset on SpiritSwap Lending Network is determined automatically by the smart contract based on the supply and demand for that asset.

Initial Lending Protocol Configurations. For any further clarification on these parameters see this Gitbook.

SpiritSwap Lending Network is set to launch on August 23rd, so stay tuned for the upcoming article in which we will provide a detailed guide on how to participate!

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