Introduce fixed interest rate borrowing to AlgoFi. This will generally work like current setup with over collateralized positions and predetermined LTV. Key difference is that the debt interest rate and terms is fixed, and on maturity entire position is discharged to free collateral. This can be a good feature and provide valuable data to test more innovative lending functionality like under-collateralized loans based on wallet reputation.
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more innovative lending functionality
You say more innovative, I say riskier/ unsafe. The second this platform rolls out under-collateralized loans I’m pulling out entirely. Judgements based on wallet reputation is based on trust. What draws me and i’m sure many others to this platform is the exclusion of trust from lending.
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We immediately assume a trustless under-collateralized product cant be built. It is hard not impossible.
sth like AAVE V3 could be interesting. they offer fixed interest rates that start for (some) stables at 5% and increase slower than the variable rate. at the optimal borrow utilization the stable borrow rate will still be higher than the variable one
general idea:
example at the bottom of the page (USDC on polygon):
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Yes, a similar implementation could work and offer alternative options. An opportunity to borrow STBL at fixed rates and terms could be attractive to some users and improve utilization of STBL.
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In some applications stability of borrow rate is more desirable that opportunity of a lower variable rate that has inherent uncertainty.
It is interesting but just wanted to make it clear that none of the links you provided imply anything about under-collateralization. Also @primus genuine question, how do you know it is hard and not impossible? I would like to know more about your vision.
yeah i read the proposal more like: fixed rate loans would be sick and btw what about under-collateralized loans?
thats why i just commented on the fixed rate loans. imo under-collateralized loans are way to risky
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You read it right, maybe I worded it wrong. I think if you can do fixed rate well, it opens other possibilities. My view is that you want STBL to have utility, you want folks to hold and use it. Not just as some trading instrument. To the best of my knowledge only Lofty offers real utility for STBL today. If you think about the type of activity on Lofty, I think fixed rate products work well there.
I think it was @lobo that offered the AAVE links and it is one example of a fixed rate product implementation on-chain.
For under-collateralized, I think there are imperfect examples to start from (Goldfinch). I think for loans the key assessment is ability-to-pay, today over collateralized lending approximates that with ease-of-liquidation, so everything is on-chain. That is obviously not capital efficient. I think you can bring high quality collateral on-chain without having the actual tokenized asset. All you may need to do is to implement an escrow system and a dedicated liquidation pool that pays a yield (like Arkadiko implementation on STX). One possible solution to explore is using a Deposit-Receipt (DR) to represent the right to a collateral. Whitelisted wallets can have funds in a pool and bid to seize the DR if the loan defaults. This assumes the new owner of the DR has a mechanism to then take it to an appropriate venue and recover the underlying collateral. Just a possible idea IMO, hard but not impossible and definitely requires collaboration between projects within the Algorand ecosystem.
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Thank you for getting back to me with all this information! Will need some time to review but I appreciate your response.
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I read through this post, but I can’t shake the feeling that introducing fixed-rate options require a kind of centralization that is akin to a bank, and this whole project appears to me to be an attempt at decentralized, bankless financing. Who will be the guarantor of this fixed rate loan? The protocol itself, right (if lending a fixed rate stable, overcollateralized asset)? But if users decided to remove their liquidity at a whim, who will guarantee the loan? If it was able to be done totally trust-less-ly, I’d be on board if one can prove it.
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Today you cannot remove your collateral without paying your loan. It will be same whether the interest rate is variable (like today) or fixed. AAVE is able to implement this today.
Dang, you’re totally right and I forgot about that. I feel so silly now.
not at all, thanks for the interest in the topic. your feedback is most welcome.
Oh! I just remembered. While you’re right that one must first pay back their loan before removing their liquidity, what if the liquidity provider has no loans outstanding?
In that case like today if your utilization is technically zero (meaning no loans), then you will be able to withdraw all your collateral, or if you choose, leave it there and continue to earn the stipulated supply interest rate.
Haven’t read all the comments but would fixed interest rate borrowing be possible if you lock in your collateral for a fixed period of time or until the whole loan is paid back?
The mechanics can be similar to what we have today in that the amount of collateral locked will be somewhat tied to utilization. The borrower should always have freedom to pay back some or all of the loan early and free some of their collateral. I think avoiding a pre payment penalty is likely preferred.
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