Borrowing
Why would I use EARN for borrowing?
EARN Protocol offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan). Instead of selling PLSX to have liquid funds, you can use the protocol to lock up your PLSX, borrow against the collateral to withdraw PXDC, and then repay your loan at a future date.
For example: Borrowers speculating on future PLSX price increases can use the protocol to leverage their PLSX positions up to 11 times, increasing their exposure to price changes. This is possible because PXDC can be borrowed against PLSX, sold on the open market to purchase more PLSX — rinse and repeat.*
*Note: This is not a recommendation for how to use EARN. Leverage can be risky and should be used only by those with experience.
What do you mean by collateral?
Collateral is any asset which a borrower must provide to take out a loan, acting as a security for the debt. Currently, EARN only supports PLSX as collateral.
Is PulseX (PLSX) the only collateral accepted by EARN?
Yes, PLSX is currently the only collateral type accepted by EARN.
How can the protocol offer interest-free borrowing?
The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the last redemption time. For example: If more redemptions are happening (which means PXDC is likely trading at less than 1 USD), the borrowing fee would continue to increase, discouraging borrowing.
Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, EARN instead opts for a fully decentralized and direct feedback mechanism via one-off fees.
How can I borrow with EARN?
To borrow you must open a Vault and deposit a certain amount of collateral (PLSX) to it. Then you can draw PXDC up to a collateral ratio of 110%. A minimum debt of 500 PXDC is required.
What is a Vault?
A Vault is where you take out and maintain your loan. Each Vault is linked to a wallet address and each address can have just one Vault. If you are familiar with Vaults or CDPs from other platforms, these are similar in concept.
Vaults maintain two balances: one is an asset (PLSX) acting as collateral and the other is a debt denominated in PXDC. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Vault's collateral ratio changes accordingly.
You can close your Vault at any time by fully paying off your debt.
Do I have to pay fees as a borrower?
Every time you draw PXDC from your Vault, a one-off borrowing fee is charged on the drawn amount and added to your debt. Please note that the borrowing fee is variable (and determined algorithmically) and has a minimum value of 0.5% under normal operation. The fee is 0% during Recovery Mode.
A 50 PXDCLiquidation Reserve charge will be applied as well, but returned to you upon repayment of debt.
Another consideration is the price of PXDC at the time of repayment. If at the time you want to repay your loan PXDC is trading at $1.02 on the market and you need to buy it, you are incurring a 2% 'fee'. You can avoid this by having your borrowed funds readily available or by being able to wait for PXDC to return to peg.
How is the borrowing fee calculated?
The borrowing fee is added to the debt of the Vault and is given by a baseRate . The fee rate is confined to a range between 0.5% and 5% and is multiplied by the amount of liquidity drawn by the borrower.
For example: The borrowing fee stands at 0.5% and the borrower wants to receive 4,000 PXDCto their wallet. Being charged a borrowing fee of 20.00 PXDC, the borrower will incur a debt of4,070 PXDCafter the Liquidation Reserve and issuance fee are added.
When do I need to pay my loan back?
Loans issued by the protocol do not have a repayment schedule. You can leave your Vault open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.
What is the collateral ratio?
This is the ratio between the Dollar value of the collateral in your Vault and its debt in PXDC. The collateral ratio of your Vault will fluctuate over time as the price of PLSX changes. You can influence the ratio by adjusting your Vault's collateral and/or debt — i.e. adding more PLSX collateral or paying off some of your debt.
What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?
The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode). This is a protocol parameter that is set to 110%. So if your Vault has a debt 10,000 PXDC, you would need at least $11,000 worth of PLSX posted as collateral to avoid being liquidated.
To avoid liquidation during Recovery Mode, it is recommended to keep ratio comfortably above 150% (e.g. 200% or better 250%).
What happens if my Vault is liquidated?
You lose your collateral as your debt is paid off through liquidation, i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% * 10 / 110) of your collateral’s Dollar value.
What is the Liquidation Reserve?
When you open a Vault and draw a loan, 50 PXDCare set aside as a way to compensate gas costs for the transaction sender in the event your Vault being liquidated. The Liquidation Reserve is fully refundable if your Vault is not liquidated, and is given back to you when you close your Vault by repaying your debt. The Liquidation Reserve counts as debt and is taken into account for the calculation of a Vault's collateral ratio, slightly increasing the actual collateral requirements.
What happens if my Vault is redeemed against?
When PXDC is redeemed, the PLSX provided to the redeemer is allocated from the Vault(s) with the lowest collateral ratio (even if it is above 110%). If at the time of redemption you have the Vault with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.
The USD value by which your PLSX collateral is reduced corresponds to the nominal PXDC amount by which your Vault’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected Vaults, making them less risky.
Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off a Vault’s debt are called full redemptions. In such a case, your Vault is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.
How can you offer a collateral ratio as low as 110%?
By making liquidation instantaneous and more efficient, EARN Protocol needs less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.
How can I take advantage of leverage?
You can sell the borrowed PXDC on the market for PLSX and use the latter to top up the collateral of your Vault. That allows you to draw and sell more PXDC, and by repeating the process you can reach the desired leverage ratio.
Assuming perfect price stability (1 PXDC = $1), the maximum achievable leverage ratio is 11x. It is given by the formula:
Why did the collateral and debt of my Vault increase without my intervention?
If Vaults are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.
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