Hey Bober, RapidsCapital and daniel_deltatheta, thank you for your messages, allow me to reply to your comments one by one.
Re your points Bober:
does this mean that for every pair another pool will be created?
Yes, exactly, so for every pair there would be a dedicated pool. For example, the one proposed here would be for the rETH/cETH pair, but there could be pools for others as well, e.g., cETH/ETH, cETH/USDC etc. To be more specific, each pool is defined by the given asset pair (e.g., wBTC/USDC), a loan tenor (e.g., 30 days) as well as a maximum loan amount per pledged collateral unit (e.g., users can borrow at most 10,000 USDC per pledged wBTC unit).
Also wouldn’t you need a lot of onchain data from an oracle for this? Or not because its in the users interest to always pay back the loan they were given.
So for the v1 we’ve developed, we wouldn’t need any oracle data. Instead it is up to the market to decide which pool to add liquidity to and borrow from. So for example, if wBTC price is currently 15,000 USDC and there are two wBTC/USDC pools, one with a max. loan amount of 10,000 USDC per wBTC and one with 20,000 USDC per wBTC, then lenders wouldn’t want to add any liquidity into the latter pool (and already invested lenders would want to redeem) to avoid getting arbitraged. So by virtue of lender and borrower activity, overall liquidity supply and demand will shift across pools as prices changes. However, this will happen independently of any oracle but purely based on market participant behavior. Similarly, and as you already pointed out, borrowers are naturally incentivized to repay their loan as long as the pledged collateral is worth more than the debt they owe. So the repayment process is settled by virtue of the inherent interest of the borrower to naturally exercise his “repay&reclaim option” only if it is in-the-money.
Will there be a token attachted to this or how should I see that?
At the moment our focus is very much on the actual core product, i.e., launching markets for Zero-Liquidation Loans. We don’t have any token yet.
Re your points RapidsCapital:
Btw I just wonder if there are any equivalent TradFi products that also follow the “zero-liquidation loan” (I mean lending services instead of its option equivalence, i.e covered call)?
Yes, so the most comparable TradFi product would be a “reverse convertible bond”. In a reverse convertible bond the borrower has the right to convert the owed repayment amount into underlying shares / collateral. If the borrower exercises this option then the lender receives shares / collateral instead of the repayment amount.
Re your points daniel_deltatheta:
just 2 points. We can launch options on rETH and cETH so that we can avoid the creation of any pools or complexity solutions.
Thx for sharing your thoughts but not sure I fully understand, would you mind explaining a bit more what you mean?
I see that market likes covered call selling, but be extremely careful with this approach. One day gamma squeeze will come, and sellers will be hurt.
Interesting, note though that one could make the same point regarding liquidation-centric loans and their associated potential risk of running into a short-squeeze scenario, i.e.: assume there’s a borrower pledging 2,000 USDC to borrow 1 ETH on e.g. Aave (assume worth 1,000 USDC) and then sells the ETH to short it. So initially, the borrower’s LTV is 50% and they’re short 1 ETH. Moreover, assume that the liquidation threshold is 80%. Now assume that the ETH price suddenly increases to 1,580 USDC such that their LTV is now 79%, slightly below the liquidation threshold of 80%. So in order to not get liquidated the borrower wants to close out their debt of 1 ETH so goes and buys 1 ETH. But let’s assume there are many other borrowers that shorted ETH as well at similar levels and need to buy back their ETH debt to repay and avoid being liquidated. In this case this could lead to a short squeeze where ETH prices could quickly push higher such liquidations will not be able to be executed in time and lenders could suffer a loss. While somewhat hypothetical, one could think of a short squeeze scenario being for conventional loan lenders what a gamma squeeze scenario would be for zero-liquidation loan lenders.
