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Unlike conventional loans that have fix interest rate, Interest rate in Floating Lending Market is uniquely determined by the supply and demand of each crypto asset. The mining of each block leads to generation of interest rates.
Here is the example of Floating Lending Market usage:
- 1.Alex deposits crypto in Nusa by enabling a specific crypto market, let's say BUSD. Once he put his BUSD in the protocol, his BUSD will be available to be borrowed by other user. In return, he will get cTokens of BUSD while his BUSD is available in the Lending market and he will earn interest. Now, Alex can sit back and enjoying earning interest as reward (in form of deposited token; BUSD). Sounds like an easy way to earn right? But many then would ask: where does the interest come from?
- 2.In another case, Sabrina also deposits her asset and follow the exact steps as Alex did. Aside earning interest reward, she turns out to be planning other thing. Sabrina wants to make her deposit as a collateral for loans. For example, Sabrina deposits $1,000 worth of BNB and wants to borrow BUSD. The collateral factor* of BNB is 75%, so she could only borrrow $750 worth of BNB maximum. Let's say today she only wants to borrow $500 worth of BUSD and use it for other purposes.
- 3.Time flies and Sabrina wants to get her collateral back. In order to reclaim her $1000 worth of BNB, she needs to repay $500 worth of BUSD that she borrowed AND additional of interest borrow rate (in form of borrowed token, BUSD). This interest borrow rate that is paid by Sabrina is where the interest that Alex received came from.
- 4.To redeem Alex's and Sabrina's deposits in the market and their interest, they will have to send their cTokens that they received when depositing their crypto.
*Collateral factor is the percentage amount of asset that can be borrowed compare to the asset being collateralized. Every asset has different collateral factor ranging from 25% - 80% in the Nusa lending market
The collateral factor is an indicator of limit on how much value you can borrow.
Collateral factor isn't the only portion of collateral that will be liquidated. If you exceed the limit, the liquidation will be triggered and 100% of your collateral might be liquidated.
Disclaimer: Lending and Borrow is high risk and advance crypto use case. Please do your own research and make sure you understand how to use Nusa Lending Platform before taking further action.