The Importance of High Leverage and Equilibrium’s Solution

Money markets (MM) are a critical part to the functionality of decentralized finance. They are a primary source of liquidity in a given network.

In more traditional, centralized financial scenarios loans provided by banks are a primary source of liquidity. This is often a sticky process involving centralized entities and bureaucracy. However, in the DeFi space obtaining loans for crypto assets is completely different. In a decentralized scenario:

• Lenders and borrowers don’t necessarily have to identify themselves. No credit history needed!
• Everyone in the ecosystem can use the markets to borrow or fund liquidity for interest.
• No loan approval necessary.

Without money markets, DeFi as we know it would be a more limited space. Innovation, utility, and growth would not be possible. So how is it that money market projects work?

The money market (MM)

Decentralized finance money markets use liquidity pools. These are mechanisms which allow users within the given network to lend or borrow funds.

Those who wish to borrow funds lock collateral of digital assets and acquire such a loan with interest determined by the current supply and demand rate. While lenders on the other hand, can generate a passive income by supplying the liquidity pool with their cryptocurrency.

Peer-to-peer finance in a wholesome sense.

DeFi lending advantages

The inherent nature of money markets allows anyone one access to monitor loans created from lending pools. This subverts over-collateralization of a lending pool, thus allowing a certain sense of security for both lenders and borrowers.

Modern money markets don’t require matching between lenders and borrowers since all borrowing operations are executed automatically via liquidity pools with standardized borrowing terms.

In addition to the benefits provided by anonymity and peer-to-peer personal lending, these products typically offer greater average returns or percentages yields on deposits.

So what are some use cases of MM in action?

Typical DeFi use cases

Let’s take money markets on Aave and Compound, for example. A common use case is the ability for users to borrow stablecoins through liquidity pools to obtain leveraged exposure to the price of ETH.

In a scenario where a user is bullish on ETH, that user may want to increase their exposure to the cryptocurrency with lower risk. Therefore, the user locks 1500 USD in ETH into the Aave money market. After which, the user borrows 1000 DAI (150% collateralization ratio) and goes to Uniswap to buy more ETH.

Typical leverage users receive from such transaction hovers around x1.5 to x2 — depending on the repetition.

Common Shortcomings

However, as the DeFi space continues to progress the inefficiencies and shortcomings become more clear. One of those is capital inefficiency in lending protocols.

In part due to high percentage over-collateralization, capital efficiency in existing decentralized lending instruments may seem questionable. This is because users’ effective leverage on their funds is often relatively low. In the end this makes lending appear unappealing and stifles an ecosystem’s liquidations abilities.

However, lower collateralization requirements allow for higher leverage on collateralized assets. This also makes for more efficient utility of the assets.

For end-users this means more flexibility — they can borrow more assets against the same collateral or avoid unnecessary liquidations. Additionally, it brings more utility when it comes to integrations with external protocols that plan for leveraging liquidity from a money market and with Equilibrium they can introduce more options for their users.

All of this can be seen and experienced through Equilibrium’s own money market and lending protocols.

Equilibrium MM in action

At Equilibrium, we want to provide our users with the best figures in an effort to provide the biggest margin for growth.

Our MM design allows us to significantly improve on leverage figures both practically and theoretically. Here’s how it works within our current setup:

In both Equilibrium and Genshiro, we already offer a leverage of up to x5 with a potential of up to x20. The current critical collateralization level is only 105% while this parameter is hovering around 130% in the most lending protocols.

It’s important that we can afford lowering collateral requirements without the risk to system stability. This is only possible due to our sophisticated on-chain risk, pricing models and liquidation mechanics.

In essence, we migrated away from the more traditional DeFi liquidation/keeper approach and make insurers provide liquidity in advance. Therefore, when borrowers eventually liquidate, they do so against this insurance liquidity. This means there is no need to scramble for people or funds which are willing to act as keepers/liquidators.

A unique approach

Through Equilibrium’s unique approach to pricing risks on-chain, EQD stablecoin generation (and general asset borrowing) has a 3 layer protection system. This is unlike other collateral backed lending. Why?:

1. First layer: overcollateralization of borrower positions to ensure safety for both parties.

2. Second layer: insurance fund which absorbs borrower liquidations.

3. Equilibrium treasury: recapitalizes insurers in case of failure.

Where we stand currently

With all this said — what can users expect available when interacting with our ecosystem? At the moment the Genshiro treasury holds 15% of the entire GENS supply (~ $ 9M at current prices). While, 50% of the entire treasury supply (7.5% of total token supply) are set aside for recapitalisation purposes.

Our methods of operation are in place with our community in mind. More than that, our vision for a more innovative and expanding DeFi space stems first from user’s ability to be active within an ecosystem. Ecosystem activity doesn’t exist without liquidity.

High leverage for borrowers and, as a result, improving capital efficiency is one of our primary solutions to continuously providing enough liquidity for not only our own ecosystem to thrive but the future of DeFi!

Don’t miss out on opportunities within our community by staying plugged into Equilibrium and Genshiro on social media.

About Equilibrium

Equilibrium is a one-stop DeFi platform on Polkadot that allows for high leverage in trading and borrowing digital assets. It combines a full-fledged money market with an orderbook-based DEX. EQ is the native utility token that is used for communal governance of Equilibrium. xDOT is a liquid and tradeable wrapped DOT that unlocks liquidity of DOT locked in parachain auctions and delivers multiple crowdloan bonuses on Polkadot.

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