The objective of Lendroid is to create a loan marketplace where borrowers can raise funds at fair interest rates instantly, and enable lenders to earn fair and continuous returns on the funds they are willing to lend. This paper introduces three-party loan contracts and loan markets. It also explains how they help achieve the objective stated above. The three-party loan contract introduces guarantors, borrower and lenders onto a loan contract. The guarantor helps increase the lender's confidence and reduces the collateral burden on borrowers.
Each loan market defines the type of the digital asset and the amount (as a ratio) required as the primary collateral for loans issued on it. The guarantors and lenders can submit offers to the market (signaling their intention to participate in the market) even before any loan requests start flowing in. With the markets funded, the borrowers choose a market that suit them – instead of having to negotiate the terms of the loan. This process removes the need to approve and arrange funds for each loan individually. The market also encourages competition among lenders. As a result, interest rates are brought down. Loans issued have a fixed expiry. However, the markets never expire.
Lendroid brings together lenders, borrowers of digital assets, and guarantors who wish to guarantee these digital asset loans. A ‘borrower’ can collateralize a digital asset to borrow another digital asset from lenders for a short period. At the end of the loan period, the borrower has the option to extend the loan by adjusting the collateral locked or repay the loan along with the accrued interest – or he/she stands to lose their collateral. Guarantors can choose to guarantee loans issued by one or more markets they believe will remain solvent by locking up LSTs which act as secondary collateral for a loan.
The guarantors and lenders are expected to understand the financial risks they expose themselves to by participating in the loan markets. The Lendroid platform does not guarantee profits for lenders or guarantors, and expects them to perform their due diligence before deciding to involve in any market.
Role of LST holders
The guarantors hold a responsibility to choose and support markets that they believe will remain solvent. The loan remains solvent as long as the value of the primary collateral locked within the loan is greater than the value of the funds that have been lent. If the value of the primary collateral drops below the value of the funds lent, the borrower will no longer feel encouraged to repay the loan. This structure – of splitting the responsibility of discovering solvent markets – reduces the burden on lenders to be diligent about their choice of market.
The guarantors receive 20% of the interest accrued if the loan remains solvent and is repaid properly. If the loan becomes insolvent, the tokens locked in by the guarantors are auctioned off, in addition to the primary collateral, to fulfill obligations to the lender.
In the absence of a unifying platform, the tediousness that accompanies formulating loan terms, seeking interested lenders, negotiating interest rates convincing them to get involved is all too tasking for the borrower. The lender, with numerous loan requests, is bound to feel overwhelmed regarding choosing borrowers and entrusting in them. All in all, a loan establishing process becomes all too cumbersome and prohibitive.
The platform convenes the three key players of the loan under a single roof. Each market, set up by a creator has a specific collateral requirement that either appeals or do not appeal to a guarantor. The guarantor loses his deposit if the loans they guaranteed become insolvent. This fear of a losing the deposit encourages the guarantor to support markets that require borrowers to lock in a significant amount of the primary collateral. On the other side requesting the borrower to deposit too much collateral would discourage the borrower and would reduce the volume of loans under the market. It is safe to state that only a few specific markets for every collateral type, amongst the many, will be favored by the majority of the guarantors that both protects their deposits and attracts borrowers. This process is known as collateral quantity discovery.
Lenders using guarantors support as a signal and their judgment choose to participate in markets by sending in offers. Competition begins to brew amongst the lenders with regards to taking part in a loan by offering an interest rate that is both economically sensible for the lender, and first in line for the borrower. This process is known as interest rate discovery. All the borrower has to do now is to choose a market lock the required collateral and collect the funds, as the terms of the loan have been pre-established by the creator, guarantor and lender thereby significantly reducing the burdens that fall on him. Overall, the discovery dynamics introduced births an efficient market that encourages competition and ensures fair costing instant loans.
Lendroid’s Lending Origins
Before we zeroed in on Margin Trading as the ideal use case, Lendroid was already a full-fledged, decentralized, trust-independent lending platform.
For those who know what this means and possess a streak of scepticism, here’s a neat demo of Lendroid ENS loans on Kovan. Right?
On Lendroid the non-custodian margin trading protocol, the lender is the primary participant. How good or effective the protocol is depends on what kind of an experience the lender has on it.
Rules and fail safes have been put in place to not let down the Lender’s basic expectations — of protecting capital and earning risk-free interest in a low-friction manner. If the experience is low on risk and friction, and if it is invariably profitable, then he’ll come back. If it isn’t, he won’t.
Broadly, the process was designed thus:
- The lender defines specific terms for the loan — amount, interest rate, loan period, loan to value (LTV) — set in a smart contract.
- A borrower pledges digital assets into an escrow account, and If the lender’s and borrower’s terms match, the smart contract is executed, locking in the collateral and releasing the funds to the borrower.
- If the borrower satisfies the loan obligations, his collateral is unlocked automatically.
- If the borrower defaults or the collateral drops below the agreed LTV, the collateral is liquidated.
A Lender’s Journey on Lendroid
While this journey is described in full in the whitepaper, here’s a quick stroll through a short cut. I trust you will appreciate the trust-independent nature of his experience.
To begin with, like the ‘Maker’ from 0x, the lender broadcasts a loan-offer to all decentralized exchanges. This is an off-chain action. A Funding Account is made available to the lenders to deposit funds into and offer loans from.
Each loan offer is a data packet called the ‘offer object’, containing the terms of the loan, offer parameters, and an associated ECDSA signature.
Jargon alert: The loan terms and parameters are concatenated and hashed to produce a 32 byte-long Keccak SHA3 signature called the offer-hash. The lender signs this offer-hash with their private key to produce the ECDSA signature.
As discussed earlier, it is important that the interests of the Lender — who contributes to the shared liquidity pool — are protected. This is enabled by empowering the Lender to define key parameters within the offer object.
Cancelling the Loan Offer
A loan offer is deemed invalid, and therefore is cancelled, in the following cases:
- If a loan offer is availed after its expiration period: In this case, the Loan Smart Contract recognizes that the offer cannot be availed anymore, and triggers an event indicating to all Relayers that the loan with the corresponding hash is invalid. It is in the Relayers’ best interests to not display expired loans in the first place and, even if they do, they have the option to listen in on the LoanOfferCancelled event from the Loan Smart Contract.
- If a Lender decides to cancel an offer that has been left unavailed and unfilled: In this case, the lender can call the Loan Smart contract’s CancelLoan function which further triggers the LoanOfferCancelled event from the same Smart Contract, thus notifying all listening Relayers. Cancelling a loan offer is a fallback mechanism and costs gas. Therefore, it is in the best interests of the lender to set a suitable ExpirationPeriod on the offer to avoid on-chain transactions.
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