Decentralized Lending Protocol Explained
Decentralized Lending Protocol Explained
馃く Mind-Bending Lending Protocol
According to recent updates from a decentralized lending protocol, when a borrower takes out a 2 BTC loan at 50% loan-to-value ratio, 1 BTC (in USDC) is removed from the system, while the other 1 BTC remains in the liquidity pools to generate yield through decentralized swaps. The borrowed 2 BTC is recorded as an outstanding debt until repaid, and no fees are charged as the protocol earns revenue from the yield generated. This mechanism differs from a pure mint-burn model and allows the network to honor future loans using the retained liquidity.
Correct way to think about it. For a 2 BTC loan at 50% LTV, 1 BTC is kept in the system (in the pools) making money for the network. It is then at the network鈥檚 disposal to honour loans in the future. This is completely different to a pure mint-burn mechanism (Luna)
How exactly does @THORChain sell the 1 BTC? It sends it to its BTC LP for an appropriate amount of RUNE. So the BTC isn't in a vault as collateral, but it is in the network. To worry that TC cannot repay BTC when the loan is paid off is to worry that the number of BTC in TC
If 2 BTC enters the system in a loan, 1 BTC (of USDC) leaves. The net gain of 1 BTC is captured by the system in liquidity pools, where it makes yield by providing decentralised swaps. That's it. (The borrower has 2 BTC ticked up as an IOU slip, with their debt entered as
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