Nusa Lending Market is basically a decentralized marketplace which offers functionalities for lending and borrowing crypto currency. In a more technical perspective, you can say that Nusa Lending Market is a system of smart contracts developed on Binance Smart Chain that the protocol enables borrowers to take loans and lenders to offer loans through locking their crypto assets in the protocol.
Unlike conventional loans that have fix interest rate, Interest rate in Nusa 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. Furthermore, borrowers can enjoy flexibility to pay back their loans at any time as lenders also have the same privilege in withdrawing their locked assets.
When you interact to a specific market and put your crypto in the supply, you would get an equivalent amount of cTokens as a representation of user’s funds in the blockchain. Users can choose to redeem their cTokens for normal tokens alongside the interest earned. It is also important to note that every asset has a specific market and the supply and demand of the asset in the market plays a crucial role in determining the interest rates.
- 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
In terms of crypto lending market, we can easily answer what is the benefit by lending out your crypto. You just deposit your tokens and gain interest. But why people borrow crypto? Especially when you have to collateralized other crypto first that mathematically has more value than how much you borrow. The idea of borrowing crypto is you don't want to sell your current crypto but need funds.
Willy bought 1.000 BNB at a good price 5 months ago and is planning to make long term investment in BNB because he believes in its prospects. As time goes, something unexpected happens and now he needs a fast loan of $500. Willy has 2 options:
- 1.Cash out his 1000 BNB, or
- 2.Collateralized his 1.000 BNB to make a $500 loans. In a few days, he is able to get his BNB back by paying $500 + low interest fee
Borrowing crypto becomes the best option for Willy because he doesn't need to sell out his investment and lose his asset that he bought in a good price.
- Give supply to the market for borrowers and expect interest in return
- Giving supply to the market and pawning it as collateral
- Borrow crypto for various activities such as getting funds for trading spot/futures/derivatives, joining staking/events, paying short-term expenses, etc
- Paying their debts and interest to avoid their collateral to be liquidated
- Pay borrower debt that exceed the borrow limit in discounted price
If you’re taking out a loan, here’s what you need to know about liquidation. If the value of your loan exceeds your Borrow Limit, your collateral will be in underwater state. Underwater state puts your collateral to be available for liquidation. Liquidator could buy your collateral to pay your debts.
Safe = Borrowed Value in a good balanced where your loan is free to use without time limitation
Underwater = Borrowed value is in an unhealthy balance where your collateral is available for liquidation
Borrow Limit (Coll Value x Coll Factor*)
Collateral Value - Borrow Limit
*collateral factor depends on each crypto market
Case 1: Your borrowing is in a safe state where your collateral won't be liquidated. You are free to use your borrowed asset as long as you want and there is no time limitation to repay your debts.
Case 2: There is a decrease of collateral value that cause your borrow value to reach the borrow limit. Your collateral is in the underwater state where your 600 collateral could be liquidated to pay your 500 borrowed asset. Liquidator can buy your collateral by paying your debt with 10% discounted price.
Case 3: There is an increase of borrowed value that cause your borrow value to reach the borrow limit. Your collateral is in the underwater state where your 1000 collateral could be liquidated to pay your 850 borrowed asset. Liquidator can buy your collateral by paying your debt with 10% discounted price.
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.