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Pooled Credit Lines

Pooled credit lines allows a group of lenders to supply capital to borrower. In this case, the terms of the loan offering are initially set by the borrower. Once the request is created by the borrower, the loan enters a collection stage during which lenders comfortable with the terms of the raise can start depositing capital into the loan request. Pooled credit lines also allows idle capital in the pool as well as any collateral locked in by the borrower to be deployed on a passive yield generator such as Compound, ensuring full utilization of the funds. This also reduces costs for borrowers since they are not required to pay a maintenance fee on any undrawn balance, which is usually the case with lines of credit.

Creating a pooled credit line

A pooled credit line request needs to be created by the borrower. Following is the list of parameters that needs to be supplied during creation:
  1. 1.
    Borrow Amount: Total capital the borrower wants to raise, e.g. 5M USDC
  2. 2.
    Borrowed Asset: Asset the borrower wishes to borrow, e.g., USDC
  3. 3.
    Loan Duration: Duration of the loan period, e.g. 12 months
  4. 4.
    Interest Rate: The interest rate the borrower is willing to provide, e.g. 10%
  5. 5.
    Collateral Asset: Asset that will be used as collateral, e.g., WBTC
  6. 6.
    Minimum Collateral Ratio: The minimum collateral ratio that the borrower will maintain throughout the duration of the loan, e.g. 50% of the loan amount
  7. 7.
    Minimum Raise Target: The minimum amount collected which would be sufficient for the loan to go active. Thus, minimum raise target <= borrow amount. e.g. 2M USDC
  8. 8.
    Lender Verifier: Denotes the verifier by whom lenders willing to deposit capital into the pool must be verified, e.g. Twitter verifier. Note that this argument is optional - borrowers can keep participation as free for all
  9. 9.
    Collateral Savings Strategy: Savings strategy where any idle liquidity in the credit line will be deployed, e.g., all the idle USDC in the pooled credit line can be deployed to Compound
  10. 10.
    Borrowed Asset Savings Strategy: Savings strategy where any collateral locked in by the borrower will be deployed, e.g., all WBTC deposited by the borrower as collateral could be locked in Aave to earn interest
  11. 11.
    Grace Period Interest Rate: Interest rate that will be used for calculating interest during the grace period
  12. 12.
    Grace Period Duration: Grace period after the end of the loan duration in which the borrower can still repay their debt
  13. 13.
    Token transferability: If set as $true$, lenders in the loan can transfer their position to others by selling their LP tokens
The above list of parameters allows borrowers to create highly customizable offerings. Additionally, if the borrower wishes to set additional checks/restrict participation of lenders (e.g., membership to a private DAO, KYC/AML compliance, etc.), they can do so by choosing one of the existing verifiers or creating a new one that suites their requirements.

Supplying capital into a pooled credit line

Upon creating the request, the loan enters the collection stage during which lenders interested in the offering can begin depositing capital. Any additional measures, such as due diligence by lenders, whitelisting by verifiers must take place during the collection period.
Once a user supplies capital into an offering, they cannot withdraw the initial principal until the end of the loan period. The only exceptions are (i) if the request is cancelled by the borrower, (ii) the minimum raise target is not met, or (iii) the borrower is liquidated, in which case lenders receive any collateral posted by the borrower proportional to their contribution in the pool.

Borrowing from a pooled credit line

If the minimum raise target is met, the credit line enters the active stage during which the borrower can start drawing capital from it.
Once the credit line enters the active stage, all the funds collected in the request are deployed to the borrowed asset savings strategy to earn yield. Whenever the borrower wishes to borrow, the protocol attempts to pull the requested amount from the savings strategy. Borrowing from the credit line requires the borrower to lock in sufficient collateral such that the following condition is satisfied:
USD(total collateral)USD(principal + interest accrued)minimum collateral ratio\frac{USD(\text{total collateral})}{USD(\text{principal + interest accrued})} \geq \text{minimum collateral ratio}
Borrowers can draw down capital from their pool in parts. Interests are only accrued on amount that the borrower has actively drawn down. For e.g., if a borrower has an active 1M USDC credit line from which they've borrowed 200k USDC, then the borrower is required to pay interest only on the 200k USDC that they've borrowed. This is because the rest of the capital is deployed onto a savings strategy.

Repaying debt

Borrowers can repay their debt over multiple repayments before the end of the active stage of the loan. There are no fixed repayment schedules enforced by the smart contract, however, the borrower may share a pre-determined repayment schedule with the lenders through side agreements to ensure confidence. This also allows for sufficient flexibility for the borrower - for e.g., the borrower and the lenders can agree on leniency in case gas costs are extremely high near a repayment deadline. On the other hand, borrowers also have an incentive to tightly stick to pre-determined repayment scheduled, since deviating from it might create a negative impression which would hamper their future borrowing capabilities.
Any amount repaid by the borrower first counts towards repaying any interests accrued till the time of repayment. Once all outstanding interests have been repaid, further repayments by the borrower count towards repaying the principal. Repaying principal replenishes the borrower's borrowing limit, allowing them to drawn down from their credit line again.

Liquidations

Liquidation of the borrower's collateral can take place under two scenarios:
  1. 1.
    Borrower fails to repay debt by the end of the loan period: In this case, the loan enters a grace period, during which the borrower still has the option of repaying their loan. The borrower continues to accrue interest on their principal during the grace period according to the grace period interest rate. If the borrower fails to repay during the grace period as well, they're considered to have defaulted on their loan. Collateral posted by the borrower is redistributed amongst lenders proportional to their initial deposit.
  2. 2.
    Borrower's collateral ratio falls below the minimum requirements: Borrowers are required to maintain their collateral ratio above the minimum threshold at all times. Failing to do so makes their collateral liable for liquidation.
Liquidation of a given pooled credit line needs to be executed by one of the lenders of the underwater loan. This is done by calling the liquidate() function. Liquidating a loan allows lenders to take possession of the borrower's collateral proportional to their deposit in the pool, upto the value of their initial deposit. That is, the amount of collateral received by a lender upon liquidation is equal to:
collateral received=min(USD(initial deposit)collateral asset price in USD,initial deposit by lendertotal deposit×total collateral)\text{collateral received} = min(\frac{USD(\text{initial deposit})}{\text{collateral asset price in USD}}, \frac{\text{initial deposit by lender}}{\text{total deposit}}\times \text{total collateral})

Interest & principal withdrawal by lenders

Interests earned by lenders come from two sources: (i) interest paid by borrowers based on the principal they borrow, (ii) yield earn by idle capital on the borrowed asset savings strategy. Lenders have the option to withdraw either of them throughout the course of the loan period, as and when they're available. Note that while most savings strategies earn yield continuously, interest repayments by borrowers occur discretely. Thus, those can only be withdrawn by lenders when the borrower transfers them to the pool. Depending on the pre-determined arrangement between the two parties, these repayments can occur over regular intervals.
The initial principal deposited by lenders can only be withdrawn at the end of loan period.