Lenders, Borrowers and Liquidators: Explaining the key participants of our Primary Lending Facility.
Low-liquidity token holders are often relegated to the sidelines of DeFi, enjoying little to no opportunities to put their altcoins to work. Bonded’s vision is to change that and allow the growing and well-established projects alike to offer their investors the same opportunities.
After all, DeFi is all about the democratization of finance, isn’t it?
This article will cover how one of the most important pillars of Bonded, the Primary Lending Facility, works. We’ll also explore the role its three major participants fulfil within the platform:
- Lenders, who receive benefits by being able to lend out their USD-denominated stablecoin assets at attractive interest rates.
- Borrowers, who can access stablecoin loans by providing collateral in the form of either well-known, high-liquidity coins, or low-liquidity altcoins.
- Liquidators, who earn rewards from helping stabilize the platform.
The Primary Lending Facility.
The Primary Lending Platform offers a way for lenders, borrowers and liquidators to benefit. Stablecoin holders can put their savings to work by lending them at attractive interest rates. Altcoin holders can borrow stablecoins from the protocol after depositing their coins as collateral. Simultaneously, any user that wishes to help stabilize the platform can liquidate under-collateralized positions by repaying the loans associated with them, pocketing a share of the original collateral.
NOTE: Not every altcoin nor every stablecoin can partake in the PLF. Only the tokens that have received Bonded’s approval before launching and those that go through the Governance process detailed above can participate.
Apart from these three actors, the platform automates the following:
- Subtracting fees from users’ interactions with the platform.
- Charging borrowers interest for open loans.
- Paying interest to lenders.
- Paying platform rewards to liquidators.
- Dynamically balancing the interest rates for borrowers and lenders to fit the supply and demand. For example, if the demand for loans skyrockets, the rates offered to lenders might improve to incentivize them to continue contributing.
Ready to go a bit deeper?
This diagram should help you better understand or conceptualize the Primary Lending Facility!
Let’s now carefully examine what the process looks like from each participant’s point of view:
Lenders are typically users who own stablecoins and want to earn more value from them. In a financial system that has seen interest rates from banks decline to the point of being negative in some regions, users can still earn interest by lending out their capital.
These factors make the Bonded Finance platform particularly attractive to institutions and high net-worth individuals who wish to achieve higher returns on their capital. Thanks to Primary Lending, they’re able to remain exposed to USD-denominated assets by converting their fiat currency to stablecoins and depositing them to be lent out to borrowers, receiving attractive interest rates.
To do so, lenders add stablecoins to a pool within the system that allows them to receive interest. Interest is paid in the same coin that was originally added.
Of course, lenders can withdraw their stablecoins at any point. To facilitate this, we’ve introduced B Tokens that represent this collateral. B Tokens are minted upon lending and burnt upon redeeming. B Tokens are fungible and transferrable, which allows them to be sold on the open market for other crypto assets.
Borrowers are users holding certain tokens (of either high or low-liquidity) and wishing to put them to work. They can do so within the Bonded Finance platform by using their altcoins as collateral to borrow stablecoins. This is particularly attractive for early investors of projects that haven’t yet realized their potential. A token holder, in this case, can remain exposed to the project’s success without feeling like they’re missing out by keeping a bag.
To borrow stablecoins, a borrower first needs to add collateral. By doing this, they’ll receive PIXT tokens, in an amount to be determined by a simple formula: In a nutshell, less volatile assets would be awarded more PIXT and vice versa. This formula is called Loan-to-Value Ratio (LVR).
Once a borrower has received PIXT, they can borrow stablecoins proportionally to their PIXT holdings. This will encumber the PIXT tokens. Similarly, after paying back their loans, borrowers can unencumber PIXT and then burn them to redeem their collateral.
Borrowers are charged interest on open loans.
Liquidators are users that earn rewards by maintaining the balance of the Bonded ecosystem.
When a liquidator spots an undercollateralized loan position (that is, below their ideal health rate), they can liquidate it by paying out the borrower’s loan. The platform will then charge a liquidation fee (calculated in stablecoins) to the borrower whose loan was liquidated. This is levied directly against the borrower’s altcoin collateral. The fees are divided between the platform itself and the liquidator.
Since liquidations are, in their way, a competition of first come, first served, the first user to have their liquidation transaction mined by miners and approved by the blockchain will earn their share of the fees.
To continue growing and attracting users of all backgrounds, DeFi needs to accommodate every type of crypto asset to be treated equally, at least in principle. As a component of the Bonded ecosystem, the Primary Lending Facility is helping advance this new financial landscape by offering already-existing functionalities to low-cap altcoins holders and financial institutions alike.
Whether your interest (pun intended!) is to earn better returns on your savings or access new financial instruments to make the most out of your existing investments, there’ll be something in Bonded for you.
Oh… and wait ’til we show you the rest of the platform!