What are user-set rates?
What are user-set rates?
In Liquity V2, users can set their own interest rates, giving them full control over costs and improving predictability. This feature allows for adaptability to various market conditions and helps stabilize USDaf's peg.
User-set interest rates facilitate a capital-efficient equilibrium between USDaf borrowers and holders in a fully market-driven manner. Additionally, these rates serve as the primary revenue source for USDaf holders, generating a continuous, sustainable real yield for USDaf depositors and liquidity providers.
Borrowers should set their rates based on their redemption risk tolerance.
Why is being able to set your own interest rates while borrowing against your assets so important?
For the first time in DeFi, users can borrow on their own terms, giving users the ability to predictably borrow against the most premier assets in DeFi in a completely decentralized, permissionless, and immutable manner.
Borrowers will establish market rates in accordance with their individual risk tolerance without relying on governance arbitrarily changing their cost or algorithmic rates that can spike at any moment based on utilization.
Each of the 8 collateral assets that back USDaf have their own borrow markets, allowing for a spectrum of rates to develop for each asset individually.
Can I adjust the rate?
Yes, you can always adjust your interest rate at any time. Since you as a user get to set your own interest rate, you have full autonomy over your borrowing costs.
Note however, that a fee corresponding to 7 days of average interest is charged when opening the loan, as well as on any rate adjustments that happen less than 7 days after the last adjustment. Without it, low-interest rate borrowers could evade redemptions by sandwiching a redemption transaction with both an upward and downward interest rate adjustment, which in turn would unduly direct the redemption against higher-interest borrowers.
How do I decide on the right rate for me?
Setting an interest rate determines a user’s redemption risk and needs to be aligned with your goals and how actively you want to manage your position.
By opting to manage your own rate, you will have to weigh the savings from a lower rate against the higher redemption risk and the increased adjustment frequency with potential additional costs (premature adjustment fees and gas costs).
Since redemptions are performed in ascending order of interest rate (for the respective collateral asset), you will typically want to keep a buffer of other borrowers with lower rates in front of you. Choosing higher rates may increase the recurring costs of your loan, but give you peace of mind regarding unexpected market fluctuations.
See below the distribution of other users’ rates in a histogram and position yourself accordingly.
In general, those willing to actively monitor their positions, or borrowing for shorter periods of time, may opt for lower rates. Conversely users optimizing for a more passive, long-term position would be better off with setting a higher relative interest rate.
What could the average interest rate be?
These will be set, continuously, by the market and will vary over time. It can be expected that, on average, rates should be similar to borrowing on Sky or Aave. However, due to the flexibility of user-set rates, it is possible that some users will pay significantly lower rates during certain periods.
Given that 75% of the interest revenue is directly paid out to USDaf depositors , it is expected that stablecoin deposit yields should be comparable, if not higher than what competing CDP’s and lending markets offer. Thanks to the attractiveness of USDaf and assuming the emergence of external use cases (monetary premium), this could lead to lower borrow rates overall than offered by other platforms. Learn more about the spread between borrowers and lenders in our article.
What determines the riskiness of my Trove?
There are two key parameters to consider:
You have the flexibility to set these parameters as you see fit, allowing you to control the relative riskiness of each Trove. You can create multiple Troves under the same address, enabling you to manage different risk profiles for different portions of your portfolio.
Are there any other fees related to borrowing?
To impede Trove redemption evasion strategies where borrowers try to minimize their interest payments in an unfair manner, a small “premature adjustment fee” is charged on interest rate changes that happen within less than 7 days since the last adjustment (or the opening of the Trove). The premature adjustment fee is equal to 7 days of average interest on the respective borrow market. Note that this fee differs from the user’s set interest rate.
The fee is denominated in USDaf and added to the Trove's debt. The same fee is charged when a new Trove is opened or when its debt is increased (only affecting the added debt).
How many Troves (loans) can I open with the same address?
You can have multiple open Troves for the same collateral or across different collateral types, all represented as separate NFTs.
Are Troves transferable?
Yes, they are represented as a NFT (ERC-721), hence easily transferable between wallets. When you send the NFT you also send full access to your Trove and all the funds within it.
Please note that more advanced strategies like ‘selling’ Troves on secondary markets like OpenSea comes with inherent risks, and caution is advised.
How do I loop my exposure?
Looping allows you to borrow USDaf against your deposited collateral and use it to buy more collateral, increasing your exposure to the underlying. Liquity V2 comes with built-in automation to achieve this with one click (zappers). More information can be found in the Multiply section.
Last updated
