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Over-collateralized borrowing is a lending mechanism in which borrowers deposit assets as collateral worth more than the loan amount they receive. This practice reduces the risk for lenders, as they can liquidate the collateral to recover their funds in case of borrower default.
OpenLeverage takes this concept further by enabling over-collateralized borrowing with any token, while most of the lending protocols only support deposit and borrowing between a very limited set of tokens.
- Unleashing your Long-Tail Assets Holding: A user who holds long-tail assets can use them as collateral to borrow mainstream tokens (e.g., BNB, ETH, stables) for investment or other purposes. This enables them to access liquidity without selling their long-tail assets, which they may believe will appreciate in value.
- Borrow more than before: Experience unparalleled flexibility with LTV ratios of up to 80% for mainstream inter-currency lending, surpassing industry standards, so can you can now borrow more than from other platforms.
- Earn with Incentivized Borrowing: Earn rewards when you borrow or at least lower borrowing costs with OpenLeverage's unique incentive system.
- Maximize Your Earnings Potential: OpenLeverage enables lenders to access higher returns for any token of your holdings and boost their income.
- Experience Unrivaled Risk Management: Benefit from independent lending pools for each asset, ensuring optimal risk isolation and protecting your investments.
- 1.Enhanced Liquidity: Over-collateralized borrowing with any token can increase the liquidity of project tokens, making them more accessible to users and investors. This can lead to higher trading volumes and better price discovery for the project’s token.
- 2.Broader Adoption: By enabling users to borrow against a wide range of tokens, OpenLeverage’s new feature may encourage more people to participate in a project’s ecosystem. This can lead to increased adoption and usage of the project’s platform, services, or products.
- 3.Improved Tokenomics: As more users engage in borrowing and lending activities involving a project’s token, the demand for the token may increase, potentially boosting its value. This can positively impact the project’s tokenomics, making it more attractive to investors and users alike.
- 4.Access to Capital: Projects can leverage their native tokens as collateral to secure funding through over-collateralized borrowing. This provides an alternative financing option to traditional fundraising methods, such as initial coin offerings (ICOs) or venture capital, with more flexible terms and fewer restrictions.
In OpenLeverage, anyone can create a lending market for a specific token pair consisting of two separate lending pools. Both over-collateralized borrowing and margin trading involve borrowing from these two independent lending pools for trading purposes.
Let's assume someone wants to create a Cake/BUSD pair lending market. They would set up two lending pools on PancakeSwap for this token pair:
- 1.Cake → BUSD pool: Lenders provide Cake to support collateralizing BUSD to borrow Cake.
- 2.BUSD → Cake pool: Lenders provide BUSD to support collateralizing Cake to borrow BUSD.
When a user wants to engage in over-collateralized borrowing, they follow these steps:
- 1.Connect wallet: OpenLeverage calculates the maximum amount the user can borrow based on the current value of the collateral in their wallet, the platform's over-collateralization requirement, and the liquidity of the token pair on the DEX.
- 2.Choose the borrowing token: The user selects the token they wish to borrow (e.g., BUSD) from the corresponding lending pool (BUSD → Cake pool).
- 3.Borrow funds: The user initiates the borrowing transaction by entering the collateral, and the requested funds (BUSD) are transferred to their account from the BUSD → Cake pool.
- 4.Repay the loan: The user repays the loan, along with any accrued interest, using the borrowed token (BUSD). Once the loan is fully repaid, the collateral (Cake) is unlocked and returned to the user from the smart contract.
This system of independent lending pools for each token pair allows for better risk management and supports over-collateralized borrowing and margin trading in the same platform.
The calculations for over-collateralized borrowing on OpenLeverage involve determining the maximum loan amount based on the collateral's value and the platform's over-collateralization requirement. The max borrow amount for a user is limited by three factors:
- 1.The collateral value is provided by the user.
- 2.The max collateral ratio is set for the pair.
- 3.The size of liquidity of the pair on the DEX.
Here's an example to illustrate the calculations:
• User deposits 1,000 Cake as collateral • Current price of Cake: $4 • Borrowing token: BUSD • The max collateral ratio: 64%
Step 1: Calculate the collateral's value: 1,000 Cake * $4 = $4,000
Step 2: Calculate the maximum loan amount: $4,000*64% = $2,560
In this example, the user can borrow a maximum of $2,560 in BUSD against their 1,000 Cake collateral. The exact max collateral ratio may vary depending on the platform's risk parameters and the tokens involved in the transaction.
When you borrow, you need to pay interest to the lenders in the lending pool. The interest rate is dynamic and based on the utilization rate of the lending pool, which means the interest rate at the time of borrowing may sometimes be different during the holding period. Interest rates are calculated annually and on a per-block basis.
For example, if you pay a 30% annual interest rate, it means you pay approximately 0.000000009512938 of the borrowed unit per second.
When you borrow, a fee could be charged in some markets. The actual amount you receive will be after deducting fees, but your borrowing interest will be calculated based on your borrowed amount. You can see the specific percentage of fees charged for each market when you borrow.
To ensure the platform's safe and stable development and attract more depositors, the fees are distributed as follows: • 50% of the fees are distributed to depositors, boosting their interest earnings. • 50% of the fees are distributed to the insurance vault to ensure repayment to depositors.
For example, John borrows $1000, and the platform deducts a $1 fee. John receives an actual loan amount of $999. The interest calculation will be based on the $1000 principal.
50% of the borrowing fees and 20% of the liquidation penalties are reserved as insurance funds. If the loans cannot maintain the pool's repayment capacity, the insurance funds are used to compensate the lenders.
To protect user interests and avoid the risk of large positions being liquidated, a gradual liquidation mechanism is implemented for positions with a borrowing amount greater than 10% of the liquidity on the DEX. During liquidation, positions will be closed in batches.
When a position is liquidated, we charge a liquidation penalty, and 10% is distributed to the liquidator, 20% to the insurance vault, and 70% is used to buy back OLE.
To ensure the stability and efficiency of the liquidation process, OpenLeverage requires liquidators to hold a certain amount of xOLE tokens to be eligible for executing liquidations. xOLE is a derivative token of the platform's native token, OLE, representing a user's share in the OpenLeverage ecosystem. Users can obtain xOLE tokens by staking OLE tokens in the platform's staking pool.
How can I avoid liquidation?
To prevent your collateralized position from being liquidated due to a collateralization ratio falling below 100%, you can repay your loan or add more collateral to increase your collateralization ratio.
We will email reminders to add more collateral or repay your loan in advance when your collateralization ratio needs to be higher. Make sure to bind your email in the "Notifications" section on the dApp.
Why did my collateral decrease when I borrowed using a tax-charging token?
The tax will be deducted during the transfer when using a tax-charging token as collateral for borrowing. For example, if the token's tax rate is 10%, your collateral will be stored in our contract after borrowing. The contract will transfer the collateral back to your wallet when repaying the loan. After these two transfers, your collateral will be subject to a 20% tax.
Why can't I do margin trading and over-collateralized lending simultaneously based on the same lending pool?
Suppose you have an over-collateralized borrowing position and want to trade in margin. In that case, the platform will not allow you to continue borrowing from the same lending pool for margin trading, as this would affect the liquidation price of your borrowing position. In the example above, if you have a long BUSD position in the Cake-BUSD trading pair, you don't need to collateralize BUSD to borrow Cake, but it doesn't affect your ability to collateralize Cake to borrow BUSD. Conversely, if you already have a margin position and want to engage in over-collateralized borrowing, the platform will not allow you to continue borrowing from the same lending pool for over-collateralized trading.