Original Title: Insightful Examination of the No-Liquidation Lending Protocol

Original Author: SCapital

Original Translation: ChainCatcher

The current lending agreement is facing numerous challenges, as the main participants in the DeFi lending ecosystem (such as Aave and Compound platforms) have adopted several basic mechanisms:

Over-collateralization: It mainly requires borrowers to deposit a certain amount of assets (such as ETH), which is far higher than the amount they wish to borrow, usually in the form of stablecoins.

Interest rate fluctuations: Interest rates change dynamically based on supply and demand. As more borrowers utilize available liquidity pools, interest rates often rise quickly to encourage repayment or increase deposits.

Mortgage liquidation: If the market value of the collateral is lower than the critical ratio (taking into account the loan amount and interest), the collateral will be sold to pay off the user's debt.

However, this popular pattern has an inherent flaw - when market prices sharply decline, it can trigger a series of liquidations. This can lead to rising interest rates and market panic. The recent drop in CRV is a good example. The market is worried about CRV liquidation, which could cause its price to plummet, and the market is also concerned that stablecoins on lending platforms may default, which can affect the entire DeFi industry. Borrowers' concerns about sudden market downturns often lead to a decrease in capital efficiency, and their saved funds will be higher than necessary to avoid liquidation. In this pattern, it is difficult to simultaneously meet the requirements of capital efficiency, fund pool liquidity, and effective liquidation.

Innovative Solution: Non-Clearing Borrowing Agreement

This new method proposes a loan agreement with Ethereum as the main collateral and predetermined terms. Its advantage lies in its simplicity: the borrower sets a liquidation price when initiating the loan, and as long as they repay before the set deadline, their collateral remains secure.

Explanation of Mechanism

Borrower's perspective: They mortgage ETH to obtain stablecoin loans (such as USDC) without periodic interest, and lock in the liquidation price. Therefore, even if the market price of ETH drops below this price, the collateral will only be threatened when the loan ends.

From the perspective of the lender: they provide stablecoins needed for lending. The ETH collateralized by the borrower generates pledge income, from which the lender can profit. If the market price of ETH falls below the liquidation level set, they can effectively acquire ETH at the pre-agreed liquidation price.

The core of this system is the concept of stablecoin (USDC) pools. These pools have clear expiration dates and a maximum liquidation price. Borrowers interact with these pools, setting their preferred liquidation price (ensuring it is below the pool's upper limit), and then, based on the collateral, determine the amount of USDC they are eligible to borrow.

During the loan term, the borrower can repay the loan early and retrieve ETH. The liquidity of the lender is supported by the unloaned USDC; if all USDC has been loaned out, they cannot withdraw early.

Let's take two borrowers, A and B, as an example:

The borrower A proposes to provide 10 ETH as collateral and specifies a liquidation price of 1600 USDC. Based on these criteria, the borrower will be entitled to a loan of 16,000 USDC. The key issue is that if the price of ETH falls to 1600 USDC or lower at the end of the loan, the 10 ETH deposited will be confiscated unless the borrower chooses to repay the loan early.

Borrower B uses a similar program, but with different specific amounts: the borrower chooses 5 ETH as collateral and 1200 USDC as the liquidation value, which is equivalent to obtaining a loan of 6000 USDC.

Strategic Advantages Compared to Traditional Systems

This agreement gives borrowers more room to set liquidation prices, providing a buffer for potential hasty liquidations on platforms such as Aave. On the other hand, lenders can potentially enjoy higher returns than traditional platforms (such as Aave) deposit rates, especially when the ETH market price is in their favor.

Deep Comparison 

Let's assume that the market price of ETH is 2000 USDC.

Using New Protocol:

When the borrower receives 1 ETH and chooses a liquidation price of 1600 USDC, 1200 USDC, or 800 USDC.

The borrower can lend out amounts of 1600, 1200, or 800 USDC respectively.

Using AAVE:

With 1 ETH as collateral, borrow funds in the amount of 1600 USDC, 1200 USDC, or 800 USDC, etc.

The system will automatically set the ETH liquidation prices at 1927 USDC, 1445 USDC, and 963 USDC respectively. Compared to the liquidation prices under the new protocol, these points are significantly higher, which may pose greater risks to borrowers.

Return on Investment (ROI):

The annual interest rate of stETH on Lido is 4.2%. If we also consider the 70% utilization rate of the fund pool and compare it with AAVE's 2.1% USDC deposit rate:

According to the new protocol, the lenders who operate under the above-mentioned settlement values of 1600 USDC, 1200 USDC, and 800 USDC are expected to have actual return rates of 4.31%, 5.53%, and 7.98%, respectively. Obviously, these returns are more lucrative than Aave's deposit rates.

In short, compared to existing platforms such as AAVE, this new protocol provides borrowers with a more flexible and secure environment, while also offering more attractive returns for lenders.

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