Lending in crypto can be very complex, confusing, and intimidating if you don’t fully understand the process first.
The last thing we want to see amongst users of OrcaDAO is angst, so here is a quick end to end walkthrough of the process and value potential for a user:
- Step 1: User with $2000 USD in AVAX wishes to further leverage that AVAX, by purchasing more AVAX temporarily.
- Step 2: User creates a vault on app.avai.finance and places their $2000 into the vault.
- Step 3: User borrows for their collateral AVAX — an additional $1000, in stablecoin AVAI. This is a relatively safe loan, as it’s only a 50% Loan to Value (LTV) (threshold is 66.67%).
- Step 4: User takes that AVAI and exchanges it on a DEX for $1000 in additional AVAX. User then currently holds the $2000 of AVAX in the vault, plus the $1000 in AVAI-converted AVAX in their wallet, for a total of $3000 in AVAX.
- Step 5: Time passes and a few positive market days go by. AVAX has risen 20%! User’s overall AVAX is now $3600: $2400 in the vault, and $1200 in the AVAI-Converted wallet AVAX. AVAI, as the loaned stablecoin, is still $1000.
- Step 6: User converts $1000 of the wallet’s AVAX back to AVAI. $200 of AVAX remains in the User’s wallet.
- Step 7: User goes back to their app.avai.finance vault, and deposits that AVAI, deleveraging their collateral.
- Step 8: User withdraws their collateral AVAX back into their wallet. There is a 0.75% withdrawal fee, which works out to $18.00. User receives back $2382.00.
If our user had not utilized the leverage feature of the AVAI vaults, they would have had their initial $2000 appreciate 20% to 2400. By utilizing the vault, they now have $2582 total ($2382 from the vault, plus the new $200 remaining from the wallet AVAX).
In summary, here’s how the transaction flows from end to end:
Keep in mind this only goes over the use of the same asset — AVAX — for simplicity. The possibilities however are boundless in how you would like to use your borrowed funds, the liquidation risk you would like to accept (up to the maximum Loan to Value (LTV) % for the collateral asset), and the payback timing.
What is a safe/healthy ratio of LTV?
You will want to allow for some buffer room in case your collateral asset drops a bit in price over the term of your loan, and not take the very maximum allowable LTV. Every user’s risk tolerance will be different, and it will require some math for you to decide what you are comfortable with.
For example, if a -15% flash dump were to occur to AVAX and most of the rest of the market in a day, you would likely not have the time to react before another user liquidated your loan, and you would lose a partial amount of the collateral deposited.
To avoid this, an example like the one above is a ‘healthier’ level of 50% out of a maximum of 66.67% LTV for AVAX. This allows AVAX to drop 25% (.5/.6667) before you run the risk of liquidation.
To illustrate: If AVAX is $100, and you take $50 in AVAI out as a loan, for ($50/$100 or 50%), AVAX would need to fall to $75 before you broke the 66.67% threshold ($50/$75).
Of course, some users will call the above example too risky, and others not risky enough, which is where the power is in your hand to decide. This is what makes self-lending as pure of a use case for Decentralized Finance as you will ever find — you are in full control at all times of your assets and risk tolerance.
About OrcaDAO
OrcaDAO is an Avalanche native protocol designed to offer and optimize a Stablecoin (AVAI), and Ownership/Governance token (ORCA) pair that allow for lending using crypto collateral at 0% interest. The protocol centers around the production, maintenance, and sustained equilibrium of AVAI around a stable value, used by the DeFi community for a multitude of use cases — such as loaning/borrowing and yield farming — with a high level of confidence.
OrcaDAO has been thoughtfully designed and optimized to be flexible for Avalanche users’ ever-changing needs, including: no lower-bounds on multiple collateral options, partial liquidations allowing for more forgivable loan processes, a firm peg designed to float within a cent of $1.00USD, and a triple bottom line focused revenue sharing initiative in support of marine/ocean conservation and restoration efforts via the OrcaDAO SeaFund
