Introducing Altitude
TL;DR DeFi loans are over-collateralized and capital-inefficient. Altitude fixes this.
It’s safe to say that Decentralized Finance (DeFi) can get pretty volatile. Crypto market volatility can often be a hurdle for many DeFi users. This is specifically true if you’re a borrower wishing to take out a collateralized loan. There are two decisions you have to make. First, you have to decide how much collateral to use, which is directly related to the liquidation risk that you are willing to take. Then you must pick which lending pool to use. That’s usually related to the interest rate you’ll be paying.
The challenge with both of these factors is that they are, in fact, variables. Due to the volatility of the crypto markets, both variables are in a constant state of flux. As a DeFi user, you can achieve capital efficiency only by actively managing your loan, which can be a hassle. That’s precisely why we’re building Altitude. It automates the active management of collateralized loans.
But what’s so cool about collateralized loans anyway? Well, let’s take a closer look.
Collateralization
Since the birth of DeFi lending platforms, a popular trend amongst crypto holders has been the borrowing of stablecoins using their crypto assets as collateral. It’s a popular strategy because it enables you to hold on to your crypto holdings whilst unlocking liquidity, so you can have your cake and eat it too!
Lending pools, such as Aave and Compound, require loans to be over-collateralized, targeting a maximum Loan-to-Value (LTV) of 82% (depending on the pool and assets). This leaves you, the borrower, with three options:
- Actively manage your loan as your collateral value fluctuates
- Borrow at an optimistic LTV and hope for the best
- Severely over-collateralize your loan
Let’s examine these choices.
Option #1: Actively managing your loan.
This choice involves constantly making sure that your loan is at the best available interest rate, whilst also ensuring that the loan is close to the maximum borrowing capacity against the available collateral at all times. This requires constantly keeping track of when the value of the collateral increases/decreases, so that you can borrow more and repay some of the loan to keep a healthy LTV.
Sure, such an approach can be capital-efficient, but it is also time-consuming and, when done manually, far from risk-free. What often turns out to be a problematic situation is when your borrowed capital is already deployed into other activities. Additionally, this approach is gas-inefficient, especially when taking out smaller loans. For example, the cost of gas required to simply switch a loan from Compound to Aave (so that you can take advantage of a lower rate) could often negate your cost savings in interest.
Option #2: Borrowing at an optimistic LTV.
The second possible choice involves selecting a LTV that gives a good utilization of your collateral, but at the same time is sufficiently removed from your liquidation levels. This leaves you with some leeway, allowing for movement of the collateral value. Sounds perfect, doesn’t it? Unfortunately, this approach also carries a significant risk of liquidation when you’re not actively managing your loan. Let’s examine what that looks like in practice:
A loan that was at a 65% LTV on the 1st of May 2021 (when the price of ETH was $2,166) would get liquidated around the 29th of May (when the price of ETH decreased to $1,737)
Simply put, whilst borrowing at an optimistic loan-to-value will increase the capital you have available, it tends to significantly increase your risk of liquidation as well.
Option #3: Severely over-collateralizing your loan.
Since you most likely enjoy sleeping at night, you would need to severely over-collateralize your loan if only to ensure that you do not wake up to having been liquidated. Potentially, you may be aiming for 30% LTV, i.e. borrowing $30 for each $100 collateral.
But what does that actually mean for the LTV on a long-term basis?
If we follow up on an identical loan as the one above, but taken out at a 30% LTV on the 1st of May 2021, we will observe that the loan never gets liquidated.
Having security feels good indeed, but it does come at a cost. As you have access to significantly less capital throughout the duration of your over-collateralized loan, this capital can be considered as dormant capital. As this dormant capital could have been put to work during your loan period, it means that reducing your LTV to avoid liquidation will make your capital rather inefficient.
Over-collateralizing your loan is a good way of preventing liquidation, but it will make a large portion of your capital dormant instead of being put to work in other ways.
So, what’s the solution?
This is where Altitude comes in. Offering the safety of an over-collateralized loan combined with the capital efficiency of an actively managed position, Altitude removes the hassle and risk of micro-managing your loan manually.
Altitude automates the management of user loans and collateral in real time, across established lending pools and yield aggregators. When you take out loans from the Altitude vault, Altitude will optimize everything by:
- Continuously refinancing your loan at the best available rates
- Actively managing your dormant capital to generate yield
- Channeling the generated yield towards reducing your debt
Sounds complicated? It really isn’t.
Let’s look at a highly simplified example:
Alice wants to buy a new car, which costs $75k. She has ~109 ETH ($250k), but doesn’t want to sell it. Alice decides to use her ETH as collateral and borrow against it, which is when she comes to Altitude on Bob’s recommendation.
Alice takes out a 75k USDC loan collateralized with $250k worth of ETH, effectively giving her loan a LTV of 30%.
Alice moves the funds into her bank account and buys the car of her dreams:
This is when Altitude gets to work actively managing Alice’s loan.
At the time when Alice was taking out her loan, Compound offered the lowest rate for borrowing USDC against ETH, which is where Altitude financed her loan.
As the initial LTV of Alice’s loan is 30%, Altitude was able to borrow an additional 87,500 USDC (from Compound) against her collateral, which takes her LTV to 65%. The funds are then deployed into Convex Finance, where they generate a yield of 12% and since the cost of borrowing is 2.3%, Altitude is able to use the profit towards repaying Alice’s debt.
As the price of ETH fluctuates over time, the value of Alice’s collateral changes.
Throughout the fluctuations of the value of Alice’s collateral, Altitude actively manages the funds that are borrowed and used to generate yield, by actively borrowing and repaying to maintain a target LTV of 65% at all times.
When the price of ETH goes up and Alice’s LTV is under 65%, Altitude borrows more and deploys the additional funds into Convex Finance to generate yield. For example, when the value of Alice’s collateral is $422k on the 11th of September 2021 (see image above), Altitude is borrowing more than $200k, which is deployed with Convex Finance to generate yield used to repay the debt.
When the price of ETH goes down and Alice’s LTV goes over 65%, the protocol reduces the funds deployed into Convex Finance and sends them back to the lending pools. For example, when the value of Alice’s collateral is $194k on the 3rd July 2021 (see image above), Altitude has reduced its borrowing to $53.5k for deployment into yield generation.
Yield earned on activated capital is used to reduce the loan. Even though Alice isn’t making any repayments, her debt is getting reduced as a result of the active management of the loan.
Alice’s loan over time
The above example is, as already mentioned, highly simplified, because:
- The example talks about a single loan, but Altitude manages all loans as a vault, creating significant gas efficiencies, which would not be possible managing a single loan.
- The example only examines some of the extremes of the collateral value range, but Altitude manages the capital in real time and not only at the extremes.
- The example only shows Altitude working with Compound and Convex Finance, however the protocol uses multiple lending pools and generates yield from a range of platforms.
Interest rate optimization
Currently in DeFi, borrow rates vary and constantly fluctuate across lending pools as they’re responding to the utilization rates. Altitude takes care of this as well.
In addition to actively managing your collateral, Altitude constantly monitors the market for lower interest rates. Once it finds a more advantageous position for your loan, your loan gets refinanced via the new liquidity pool. This is done for you entirely automatically.
Going back to Alice’s loan described above, the initial loan is financed via Compound, but if at any point the rate for borrowing USDC with ETH collateral becomes lower on Aave (or any other leading lending pool), Altitude will automatically move that loan over to the new pool, constantly maintaining the lowest available rate.
Key benefits
In summary, Altitude provides you with active management of your collateralized debt positions, so you can be free to focus on other, more important things in your life. When you borrow via Altitude, your debt is financed via one of the leading pools at no cost to you and, therefore, no financial downside for you when borrowing via the protocol.
Simple and seamless. That’s Altitude.
