Most of the existing decentralized lending protocols currently adopt an Automated Market Maker (AMM) execution mechanism. Despite the efficiency in solving for equilibrium interest rates and aggregating lending supply, a number of drawbacks were observed regarding to AMM lending pools, namely:
- Low utilization of collateralized assets
- Lack of loan offers customization
- Heavy reliance on settlement and liquidation system
The acLoan application is an innovative approach in integrating option features with collateralized loan instruments executed via an orderbook mechanism. The goal is to achieve:
- 1.Dynamic utilization of collateral assets
- 2.Greater flexibility in loan terms
- 3.Mitigate the need to constantly monitor LTV threshold and margin calls
Every acBTC loan product (referred to as acBTC orderbook) adopts an intrinsic value parameter. The intrinsic value serves as a proxy for Borrowers and Lenders to make borrowing and lending decisions. Combined with Borrowers and Lenders’ assessment on the outlook of BTC prices, they can replicate a call/put option on BTC with a lending/borrowing offer.
Borrowers can collateralize acBTC to borrow stablecoins based on the intrinsic value.
Each acBTC orderbook is differentiated by the intrinsic value and tenor; providing greater flexibility on collateralization level for Borrowers and Lenders with various degrees of risk appetite.
Example 1A: Bearish view <> acBTC 10,000/10D Orderbook
Alice has a short-term bearish view on BTC prices, she believes the price of BTC will fall to $8,000 in the coming week. She believes an intrinsic value of $10,000 is a great way to hedge from the potential price fall. Alice borrows 20,000 USDT by pledging 2 acBTC as collateral in the acBTC 10,000/10D orderbook. If her view is accurate and the price of BTC falls through to $9,000 in the coming week, a liquidation event would occur and Alice would not need to repay the principal. In other words, Alice has effectively sold 2 acBTC for 20,000 USDT while the market value of the collateral is now worth 18,000 USDT at the time of liquidation.
Example 2A: Bullish view <> acBTC 8,000/7D Orderbook
Bob has a short-term bullish view on BTC prices, he believes the short-term price will reach 14,000 with sporadic volatility in a low time frame period. He believes lending stablecoins at an intrinsic value of $8,000 is a great option for him to potentially increase his acBTC position. Bob decides to lend out 40,000 USDT in the acBTC 8,000/7D orderbook. If the Borrower defaults on the loan, Bob would be entitled to the 5 acBTC collateral upon maturity. In other words, Bob has acquired 5 acBTC at the cost of 40,000 USDT.
Liquidation event occurs when the historical moving average price (also referred to as MA) triggers the intrinsic value price of the acBTC orderbook. Once triggered, the specific acBTC orderbook would be temporarily disabled for liquidation and settlement. Meaning no new loan orders can be created or engaged while active loan positions are being settled.
Historical moving average price is used as a liquidation signal in every acBTC orderbook. Relative to market prices, moving average can soothe out short-term price volatility. Hence, it can greatly reduce pressure on the settlement system.
Adjustments to calculating the historical moving average price will happen when BTC prices are going through a prolonged period of extreme volatility. A suitable time frame will be decided by community Governors.
Continuing from Example 1A:
Alice borrowed 20,000 USDT from the acBTC 10,000/10D orderbook. On day 6, the 10-day moving average price of acBTC fell to $9,800; triggering a liquidation event. Alice forfeits the collateral and keeps the 20,000 USDT.
Continuing from Example 2A:
Bob lent out 40,000 USDT in the acBTC 8,000/7D orderbook. On day 5, the 7-day moving average price of acBTC fell to $7,500; triggering a liquidation event. Bob seizes the collateral of 5 acBTC.
To maintain a balance between interest rate reflecting orderbook depth without sacrificing interest rates certainty for Lenders and Borrowers with large orders, the acBTC loan application introduces a dynamic interest rate system for different order types:
Interest rates for market orders are determined by the orderbook chain. Lenders and Borrowers can utilize market orders for instant order execution. Once a market order is placed, the order will be filled at the corresponding interest rates in the orderbook chain.
Example: Orderbook chain (Lending side)
Alice is looking to borrow 50,000 USDT immediately. She submits a market order. The order will be divided into 50 lots. Since only 20 lots are available at 5%, The initial 20 lots will be executed at 5.00%. The remaining 30 lots will be executed at the next best rate, which is 5.10%.
Effective interest rate for Alice = [(20 * 5.00%) + (30 * 5.10%)] / 50 = 5.06%
Interest rates for limit orders are set by Lenders and Borrowers. The interest rate setting is bound by a dynamic range based on the market interest. Lenders and Borrowers can adjust the range at which they would like to receive/pay on the loan. Limit orders are ideal for obtaining interest rate certainty over the duration of the loan term.
Interest rate range = Market interest rate +/- 25%
Market interest rate = 5.00%
Alice wants to borrow 200,000 USDT at a more favourable rate than the current market rate. She sets a limit order by adjusting the interest rate to 4.5%. Alice’s borrowing order is placed on the orderbook chain, 20 lots at 4.5%.