Knight Lending AMA
Part 1
Welcome to the first AMA for the Knight Lending Network hosted by Brovin and RR, with special guest Barbaloot Guru from the Ola Finance team.
This AMA will be focused on the lending network itself, the services it provides, and how to utilize it in a safe and effective manner.
We are doing an AMA with the development and support team for the upcoming lending network, Ola Finance.
The lending network is a KnightSwap project led by and supported by the Wolf Den (strategic development).
The team building the lending network is incredible and is hyper focused on safety and security first. That is the topic of today’s AMA.
Questions about which assets will be available, specific numbers, and advanced strategies will be addressed at a later time.
If you are brand new or something above doesn’t make sense, we always recommend NOT to rush or FOMO
BarbalootGuru — Hi all! Excited to answer your questions and talk to you about Ola Finance and the Knight Lending Network 🚀
brovinharris —What’s up everyoneeeeeeee!
First off, huge welcome to @BarbalootGuru thanks for dropping in 🙂 we are SUPER excited to have you today.
BarbalootGuru — Happy to be here and meet everyone! I’ve seen some pretty great involvement from this community before, so really happy for the opportunity to participate in an AMA.
brovinharris — Yes, our community is everything 🙂
So to kick things off, just wanted to start off with a brief intro about you guys. We obviously had a very specific reason in mind when we chose you guys to help build out the Knight Lending Network, but not everyone here knows you guys quite as well as we do.
Could you please give us a little piece of your guys’ history, how Ola Finance came to be, and what makes you guys our obvious choice?
BarbalootGuru — Sure! So Ola Finance was created as a by-product of DeFi summer (2020), when there were amazing Yield Farming opportunities going on across the entire DeFi ecosystem.
To benefit from all these different reward distributions, a person needed to have a bunch of different crypto tokens — almost a different one for every new opportunity!
We realized that not everybody wants this kind of exposure; we wanted to access the reward opportunities without purchasing all these different tokens.
Unfortunately, the highly gated lending networks such as Compound or Aave don’t support borrowing of large variety of tokens. And other lending networks like CREAM have one long list of supported assets, meaning it’s one ever expanding risk model.
We saw an opportunity to build lending networks with isolated risk, customized to support any project’s native tokens, so any person can borrow/lend their tokens 🙂
This puts the power back in the projects’ hands while allowing them to expand their product offering!
brovinharris — Wow! Providing optionality while mitigating risk, what a mission! Sounds like a great fit the Knight Ecosystem and Wolf Den 😜
So you’ve kind of addressed this briefly, but can you expand on the purpose of a lending network and why someone would want to use one?
BarbalootGuru — Yeah, so a Lending Network provides crypto holders with two base functions.
1) The ability to lend out your crypto assets and earn some passive interest, while still holding on to your assets (think like a savings account at a bank!)
2) The ability to borrow other crypto assets. This allows users to borrow stable coins, acquire leverage on their existing assets, or even borrow some small-cap tokens to take advantage of short term yield farming opportunities (just like we wanted to do during DeFi summer)!
Using these two base functions, other strategies can be achieved — but let’s not get ahead of ourselves 😉
brovinharris —Haha yes, we will not go too deep into strategies today xD but both of those base features sound like HUGE upgrades to my DeFi experience that I will definitely be taking advantage of. SO EXCITED!!!!!!
So those are some really cool features, but in laymen terms, how does all of that work really? We want to make sure the community understands what they might be getting their selves into
BarbalootGuru — I think Lending is the easiest function to explain. You deposit your tokens into a money market (ie. a pool consisting of that specific token), and earn interest from other users who want to borrow from that pool.
The interest rate is variable, meaning that the greater the demand for that specific asset, the higher the earned lending rate will be.
If a user wants to borrow tokens as well, they can then enable their supplied assets to be used as collateral and borrow against those assets. The amount that they can borrow is fixed according to a parameter known as the collateral factor — one of many customizable parameters set by the Lending Network Creator (i.e. Knight)
It’s important to note that someone can be a lender and NOT borrow, but to borrow assets you must first lend (ie. supply collateral).
For example, if you deposit $100 worth of KNIGHT and KNIGHT has a collateral factor of 70%, you can borrow AT MAX $70 of another asset.
It’s very important to note that you need to keep the value of your collateral high enough to support the amount you are borrowing, otherwise you can risk getting liquidated!
This is an important part of safe lending/borrowing that all users should understand before engaging.
brovinharris —ahh so much great information in one answer. So basically, what i’ve gathered is that:
- You must first lend in order to borrow.
- The interest from borrowers pays the interest to lenders.
- The collateral ratio is an EXTREMELY important concept that everyone needs to understand to safely utilize a lending network.
Since this is such a crucial concept, could you give us a little bit more details on the collateral ratio and what liquidation is? Also whether there are any other major risks when using a lending network or if liquidation is the primary concern?
BarbalootGuru — So “liquidation” is the process of repaying a borrower’s debt on their behalf, in exchange for a portion of their collateral. Liquidations are important in keeping a lending network healthy, because otherwise there would be a lot of bad debt (eg. someone’s collateral could be worth $10, but there borrowed amount is worth $1000 — they have no reason to return their borrowed amount, other than being a very nice person 🙂)
A position can get liquidated when it’s under-collateralized, meaning there is no longer enough collateral to support the amount that has been borrowed.
The exact point of liquidation occurs when the “Liquidation Factor” is reached. Similar to the collateral factor — which determines the max amount someone can borrow — the liquidation factor determines the maximum ratio between a borrowed position and it’s collateral before the liquidation occurs.
I KNOW THIS CAN BE CONFUSING. Don’t worry, you’re not alone!
Example
Say a user deposits $100 of ETH and they want to borrow USDC. Let’s pretend ETH has a collateral factor of 70% and a Liquidation Factor of 80%.
This means that the user can borrow a maximum of $70 of USDC. But if the price of ETH were to fall, and the supplied ETH is now worth $87.5, the position could get liquidated. This is because the value of the borrowed amount has now reached 80% of the supplied ETH value (the liquidation factor).
In the Knight Lending Network, there will be helpful graphic which helps users visualize their position so they don’t have to do all of these calculations 😅
brovinharris — Awesome, that is very helpful to know.
I hope everyone takes a minute to soak that in, extremely important consideration before making ANY moves.
Last question before we open it up to community.
Safety and security is obviously a main focus for us (if you couldn't already tell from the questions above).
What extra steps does Ola Finance take to ensure the safety and security of the lending networks it launches for its communities?
BarbalootGuru —Before answering that question, I just want to say that there is a lot more documentation regarding liquidation risk and risk management tactics that I encourage everyone to check out!
Both in the Ola Finance gitbook
https://olafinance.gitbook.io/ola-finance/welcome-to-ola-finance/master
and potential future materials from Knight!
As for security: Ola Finance has conducted two audits by reputable firms to ensure there are no issues with our code. In addition, we help our network owners monitor the state of their lending network and offer advice to tune parameters when necessary. On top of that, we have a number of Ola-unique safety parameters that help reduce the damage that could be done from a hack.
This is all on top of our thorough work with the Knight Team already to ensure that this would be a smooth deployment 😎
R R — Awesome! Appreciate that. And I can definitely attest to the thoroughness you and the Ola team display during the Knight Lending Network build process so thank you!
Ok Community!
In a moment, we will be opening up for Q&A
As a reminder, we won’t be answering any questions around specific assets and their timelines so please keep your questions around lending networks, safety and security while using them to keep yourself safe, and their general functions.
Community Questions
AlejoM —In your experience with other projects, what are some mistakes/errors investors make that would help them to not be liquidated and what mindset investors should have for a better use on lending network?
BarbalootGuru — The best way to protect yourself against liquidations is to understand how, why, and when they occur. After reading this page, here are some additional tips that can be used to help decrease the likelihood of liquidations:
- Don’t Borrow the Maximum Amount: There is usually a buffer between the Collateral Factor and the Liquidation Factor, but you can offer yourself more of a buffer by not borrowing the maximum amount.
- Use a Stablecoin to Lend/Borrow: As we learned, positions can change due to price movements in both the supplied asset and the borrowed asset. By using a stablecoin for one side, you reduce the number of variables you have to monitor.
- Monitor Your Position: After initiating a position, make sure to check on it frequently to ensure it remains in good health.
- Have a Repayment Plan: The longer you have a loan out, the more chance there is for liquidation. Although loans through Ola’s lending networks have no required repayment date, it’s smart to have a plan to repay your loan before taking it.
The only way to fully prevent liquidations is to keep the value of your collateral worth sufficiently more than your loans. If you followed the safe borrowing tips and are still at risk of liquidation, two measures can be taken:
- Pay Back Your Loan. The recommended way to avoid liquidations is to pay back at least a portion of the amount you have borrowed.
- Deposit More Collateral. By supplying more collateral to a lending network, you decrease your loan to value ratio (LTV). For example, borrowing $700 against $1000 of collateral is using 70%, but borrowing $700 against $2000 collateral is using 35%. You can deposit more of the same asset, or a different one available in that same lending network. If using multiple forms of collateral, keep in mind that each has its own Liquidation Factor.
jakefromstakefarm — Could you explain how debt service works with a crypto lending network? To expand…Do you use the same crypto you borrowed to pay the interest on the debt and how often are payments due?
What happens if you miss a payment?
Is there a set maturity date for paying back the loan in full?
Any other important terms on the loan we should be aware of (aside from what’s already been discussed, of course)?
BarbalootGuru — Great question! Debt is compounded on to your existing borrow position, and accumulates in the same token that you borrowed.
Unlike traditional finance, there are no repayment dates that must be hit — neither maturity dates or short-term repayment dates. As long as your position remains properly collateralized (remember that liquidation threshold we talked about 😉) you can keep your borrowed position open!
There are no other “terms” to the loan — just be aware of what causes liquidations and how to avoid them!
knowthylegde —With everything going on in the crypto space, will there be any insurance for stakers. For example if there is a hack will users be refunded. This comes to mind as of most recent projects have had issues with losing users funds due to de-pegs. And if so any plans for future securities of such.
BarbalootGuru — We are in the process of getting listed with an insurance provider so that each individual user will have the option of purchasing crypto-insurance should they please. This is becoming a standard option for the space, and we are happy to take part in this!
Jason Ansley — It seems that if collaterlozation max is say 70% (or 25% or whatever)
If one borrows, it is prudent to borrow say 50% or one’s max allowed. So in the two examples, say only borrow 35% or 12.5% to mitigate liquidation even though liquidation rate seems to have a small buffer built in
BenMaria — Question for OLA: I have read your gitbook and discord, and I understand that each LeN is operating as a separate instance thus isolating risks. I also read that there was an exploit on the Fuse LeN on 31 March 2022. With that as background, here’s my questions. Can you explain further on:
1. how the exploit happened?
2. what measures are in place to ensure it doesn’t happen to Knightswap LeN?
3. Are there any independent party’s audit on rectification done on your smart contract to ensure a similar exploit doesn’t happen again
4. Since OLA is a Lending as a service and responsible for security, can you elaborate on current process in place to ensure security and mitigate possible exploits? Thanks in advance.
BarbalootGuru — Last question for today! Due to time constraints, I’ll come back at a later date to answer the rest 💪🏻
While all details regarding the Fuse exploit are heavily documented, it’s important to address it here — both to recognize that an attack did occur, and to point out that Fuse Lending Network was the only one affected.
The attack was possible due to the use of an atypical token standard being minted from Fuse’s bridge (ERC 677 rather than ERC 20), and this same token being utilized in the lending network without us knowing it was an ERC 677. Ultimately, it was due to poor communication between both parties as the use of the ERC 677 was not publicly documented nor discussed.
While the incident was unfortunate, we’ve learned to not rely on our partners’ expertise and to scrutinize their products much more heavily. In addition, we performed a security upgrade that allows future partners to list ERC 677 tokens (should they want to), amongst other things. More details can be found here:
https://ola-finance.medium.com/ola-finance-rolls-out-security-revamp-9b2b437591f1
Also, just completed our second audit:
https://olafinance.gitbook.io/ola-finance/security-reports/audit-reports
Important Links to Ola Finance’s Social Channels (and reminder to please not ask Knight Lending Network questions in their channels):
Website — https://ola.finance/
Telegram — https://t.me/ola_finance
Twitter — https://twitter.com/ola_finance
Discord — https://discord.gg/r4bUdM2Vcg
