🛠️How Pools Work [ELI5]
Market Participants
Lenders choose the following terms when they deposit funds into a pool
Collateral = the collection you want to lend to
Loan Limit (Price or LTV) = highest price (or LTV) you are comfortable lending at
Max Term = longest duration you are comfortable lending to
Rate Tier = target interest rate you are comfortable lending at (defaults to market)
Deposit Amount = how much capital you are comfortable lending
Borrowers will see single offers according to these terms and can then borrow from that pool
How Pool capital is organized and aggregated
Capital is organized by Price, Term, and Rate Tier first THEN aggregated with all Deposits. This allows ALL lenders to act collaboratively and provides borrowers with the best possible terms.
All risk tolerances: Lenders with low risk tolerances can participate at lower returns in the same loan as high risk tolerance lenders who want higher returns. The low risk lenders get insurance (default protection) from the high risk lenders, while high risk lenders get leverage (boosted returns) from low risk lenders.
No capital requirement: all capital is aggregated so no matter how much you deposit, your capital will be combined with other depositors to originate loans.
Single offer for Borrowers: once the capital is organized and aggregated, single loan offers with the best possible terms are then made available to Borrowers. Borrowers simply choose the Term and Amount they want to borrow in a single click.
Market Organization by Price (Vertical Stacking)
Let's assume an Aethir Node is currently worth 80k ATH. In the example below, there are two lenders with different risk profiles:
Lender 1 is willing to lend 60k @ 18% APR
Lender 2 is willing to lend 30k @ 12% APR
The borrower takes a loan for 60k @ a blended rate of 15% APR because:
Lender 1 supplies 30k at 18% APR
Lender 2 supplies 30k at 12% APR
While the borrower receives a single interest rate of 15%, the Lenders will split the interest disproportionality, so that Lender 1 is compensated for taking on higher risk of bad debt.
Lender 1 receives 20% APR on their 30k
Lender 2 receives 10% APR on their 30k
In the same way that return is split disproportionally, so too is the risk carried by each lender. If the value of the asset decline from 80k to 50k and the borrower defaults:
Lender 1 bears the loss first, up to 100%, in this case 10k
Lender 2 bears no loss unless the asset value drops below their Loan Limit of 30k
Market Organization by Rate and Duration (Horizontal Stacking)
While price decisions drive lender collaboration, rate decisions drive lender competition and act as a ranking mechanism when two lenders have identical price decisions. Borrower preferences on duration are first matched to the appropriate lender decision, then backfills any remaining capacity in ascending order of duration.
Rate Tier: the interest rate offered by the lender to the Borrower
Duration: the term/length of the loan offered by the lender to the Borrower
Continuing our above example, if two separate lenders are both offering the same Loan Limit of 60k, but have different Rate Tiers or Durations, then the priority of their capital is organized by:
Rate Tier: the lowest APR has the highest priority
Duration: the longest term has the highest priority
This ensures that the Borrower always utilizes the capital in the order that offers the best terms.
Conclusion
This protocol design provides the most efficient borrow/lend experience for all stakeholders
Capital aggregation creates the deepest liquidity possible
Lenders no longer need to compete, but can work together and be compensated for where they stand on the risk spectrum
Borrowers no longer need to worry about receiving the most efficient loan offer given the parameters of their needs
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