Knight Lending Network
Supporting Documents
Welcome to the Knight Lending Network supporting documents.
If you have an understanding of the lending network and need help with the “How To” check out the article below.
https://medium.com/knight-bsc-dark-knight-ftm/knight-lending-network-c57010d8152
Contents (Control F with the title to skip)
- FAQS
- What Is Lending?
- Earning Interest
- Lending Market Info
- What Is Borrowing?
- How Do I Borrow Tokens?
- Over-Collateralized Lending
- How Much Can I Borrow?
- Paying Interest
- What Can I Use Borrowing For?
- Risks Of Borrowing
- Liquidations
- When Is A Position Eligible For Liquidation?
- What Triggers A Liquidation?
- How Much Will I Lose If I Get Liquidated?
- Preventing liquidations
- Lending Incentives (RainMaker)
- AMA
FAQS
1. How often the collateral factor is calculated? Ie can it be adjusted in the during the middle of a loan and then cause liquidation?
Collateral Factor cannot be adjusted in a direction that would cause liquidation. All of the Collateral Factors have started conservatively and can only be moved in one direction, irreversibly.
2. What is the difference between a green APY (positive) and a red APY (negative)?
If the APY percentage is green (positive), that means you are earning money. If the APY percentage is red (negative), that means you are paying money.
3. How do I calculate when I will get liquidated if I am providing two different assets with different liquidation factors?
You would calculate the total credit.
Let’s assume that you put 1,000$ in ETH (LF of .75) and KNIGHT (LF of .65)
1,000$*0.75= 750$ (ETH)
1,000$*0.65= 650$ (KNIGHT)
Total of 1,400$.
So when your total borrowed value hits that amount (assuming supplied value stays the same), a liquidator can choose which asset they’d like to repay (up to 50% max of your position) and which they’d like to receive in return
4. How often will my balance update on the lending network if i’m supplying?
The balance won’t update, because the Supply APY is automatically compounded behind the scenes as part of the Ola Protocol. It gets absorbed into the oTokens (the receipt token a user receives for supplying), and the conversion rate from oTokens to the deposited token absorbs the interest that borrowers pay. So when you withdraw your supplied assets, you will have more than you started with
What Is Lending?
Lending is the process of depositing (i.e. supplying) tokens to a pool. In exchange for providing liquidity to this pool, users receive interest on the tokens they have deposited. The interest that lenders receive comes from other users who are paying interest to borrow tokens.
Lenders can withdraw their tokens at any time as long as their tokens aren’t being used as collateral for an active borrowing position, and there are more tokens in the supply pool than you are attempting to withdraw. There is no time lock or withdrawal penalty.
If there are less tokens in the supply pool than you are trying to withdraw, you can make a partial withdrawal. You will have to wait until either some borrowers pay back their loans, or more lenders provide liquidity in order to withdraw the full balance.
Earning Interest
After depositing your tokens, the pool will mint oTokens — or “receipt tokens” — and credit you. These oTokens show that you have supplied assets to one of Ola’s lending networks. When you go to withdraw your tokens from the supply side, the system will ask for those oTokens back — so make sure you hold on to them!
The conversion rate from oTokens to the deposited token absorbs the interest that borrowers pay. This means that when you withdraw your tokens, you will receive more than you started with, proportional to the token’s APY.
It is important to note that APYs are floating and not fixed. Rates get updated on a per-block basis and can fluctuate significantly within relatively short time spans. Rates that lenders receive are determined by the rates that borrowers pay
Let’s walk through an example.
You deposit 10 KNIGHT with an average APY of 5%. This means that the APY can fluctuate through the year (which it will) but by the end of the year the average would have been 5%.
First, you will notice that your wallet now has 10 KNIGHT worth of oKNIGHT in it — these are your receipt tokens. When you go to withdraw your KNIGHT after 1 year, you will trade back the oKNIGHT and receive 10.5 KNIGHT in return (your original 10 KNIGHT plus the 5% APY).
Lending Market Info
NOTE: Assets and parameters are subject to change & the most up to date market info can be found in the network tab.
What Is Borrowing?
Borrowing is the act of taking a loan from from the lending network. Contrary to lending which has users supplying tokens to a pool of assets, borrowing is the act of taking tokens out of the pool of assets.
How Do I Borrow Tokens?
In order to borrow tokens, a user must first supply tokens as collateral (ie. become a lender). This is because the Knight Lending Network relies on over-collateralized loans.
Over-Collateralized Lending
An over-collateralized loan means that in order to take a loan from one money market (this concept was first introduced by The Compound Protocol) one must deposit tokens of higher value in another money market (known as collateral).
Not only that, but the borrower must make sure they maintain a proper amount of collateral for the entire lifespan of the loan.
Over-collateralized loans are the dominant paradigm for DeFi lending because users generally interact with smart contracts pseudonymously. This means that in the context of lending, there is no room for identity-based enforcement of loan repayment (compared to how it works in traditional lending).
It’s important to mention that a user can still lend tokens and earn interest without borrowing tokens.
After depositing your tokens and enabling them as collateral (click the button labeled “Collateral” next to your token in the app).
You can borrow any of the available tokens from that same lending network. You can even borrow the same token you deposited as collateral!
Note: Any interest you earn from depositing funds helps offset the interest you accumulate by borrowing.
How Much Can I Borrow?
The max amount that a user can borrow depends on the amount of collateral deposited and the token’s Collateral Factor.
The Collateral Factor — expressed as a percentage — is a multiplier used against your supplied assets.
Example
Let’s say you supply $1000 WBTC as collateral, and WBTC has a collateral factor of 70%. This means that you can borrow up to $700 of any token ($1000 x 70%). Each token in a lending network (WBTC, ETH, etc.) will have its own collateral factor as determined by the creator of the lending network.
Note: The amount you can borrow is based on the Collateral Factor of the asset (or assets) you are supplying. In the example above, it doesn’t matter what asset a user borrows — they supplied WBTC and it had a Collateral Factor of 70%.
How often the collateral factor is calculated? Ie can it be adjusted in the during the middle of a loan and then cause liquidation?
Collateral Factor cannot be adjusted in a direction that would cause liquidation. All of the Collateral Factors have started conservatively and can only be moved in one direction, irreversibly.
Paying Interest
Just like in traditional finance, borrowers are required to pay interest on their loans. This interest goes directly to the lenders/suppliers of that token, minus the Reserve Factor.
The interest that borrowers pay is determined by the APY listed for the token(s) they are borrowing. It is important to note that APYs in Knight Lending Network are floating and not fixed. Rates get updated on a per-block basis and can fluctuate significantly within relatively short time spans.
The interest that accrues each block is added to a user’s borrow position, meaning their borrow position slowly grows over time in proportion to the APY.
To pay back this accrued interest, a user simply pays back a portion of their loan.
What Can I Use Borrowing For?
In essence, borrowing allows people to access the value of their assets while still holding on to them. For example, assume you have some ETH but need USD to pay for a car. Instead of selling that ETH, you could use it as collateral and borrow stable coins against it. Then, if ETH goes up in value, you can sell the ETH for more and repay the loan, pocketing the difference. Of course, there are other use-cases, usually of a financial nature:
- Enter a short position on a token
- Leverage a long position on a token
- Borrow a token for a lucrative liquidity mining opportunity, while limiting exposure to the token
Risks Of Borrowing
After borrowing tokens from a lending network, it’s important to continuously monitor your position to ensure you have enough collateral to support your loan. As prices of tokens fluctuate, your position can be in danger of liquidation if not properly managed.
Liquidations
Liquidators serve an important role in keeping a lending network healthy and preventing the creation of bad debt. They ensure that there are always enough funds in a lending network to support the open positions. Having said that, users should be wary of getting liquidated and take necessary precautions to prevent it.
What does it mean “to get liquidated”?
Liquidation is the process of repaying a borrower’s debt on their behalf, in exchange for a portion of their collateral. In a healthy lending network, liquidators are incentivized to constantly look for loans eligible for liquidation. The process is as follows:
- The value of a position changes past the liquidation factor, so a signal indicates that it’s now eligible for liquidation
- A liquidator comes in and repays a portion of the loan on behalf of the borrower
- After repaying the borrowed amount, the liquidator receives a portion of the collateral proportional to the amount they paid off, plus the Liquidation Incentive
When Is A Position Eligible For Liquidation?
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 Liquidation Factor — expressed as a percentage — is a multiplier used to calculate the value at which these liquidations can occur.
Say a user deposits ETH and it has a Liquidation Factor of 80%. This means that when the value of the borrowed position reaches 80% of the supplied ETH value, a liquidation can occur.
Each token in a lending network has its own Liquidation Factor, as determined by the creator.
The most up to date liquidation and collateral factors can be found under the network tab
What Triggers A Liquidation?
Two price movements can move a position closer to liquidation, and it’s important to pay attention to both to know when a loan must be adjusted:
- The value of the collateral (what you are supplying) token falls
- The value of the borrowed token increases
Let’s look at an example of both cases:
- A user deposits 1 ETH as collateral when 1 ETH = $1000 USD, and uses it to borrow $400 DAI. Let’s assume ETH has a Liquidation Factor of 80%, meaning the liquidation point occurs when the value of the borrowed asset equals $800. If one month later, the price of ETH falls to 1 ETH = $500, the new liquidation point is $400 (80% x $500). If the user didn’t adjust their initial loan, they will be at risk of getting liquidated.
- A user deposits $1000 DAI as collateral and uses it to borrow 0.5 ETH when 1 ETH = $1000 USD. Let’s assume DAI has a Liquidation Factor of 75%, meaning the liquidation point occurs when the value of the borrowed asset equals $750. If one month later, the price of ETH rises to 1 ETH = $1500 USD, the value of the borrowed tokens has increased to $750 USD (0.5 ETH x $1500 USD), thus making the position eligible for liquidation.
How Much Will I Lose If I Get Liquidated?
In the Knight lending network, the amount of a position that can be liquidated at one time is set at 50% (ie. the Close Factor). This means that only part of the borrower’s debt is repaid and not all of it.
Let’s assume a position in which you have deposited $1,000 in DAI and borrowed $400 in ETH is eligible for liquidation. Assume the Liquidation Incentive for DAI is 10%.
A liquidator will come and pay on your behalf up to $200 in ETH (50% of what you borrowed). In return, the liquidator will get $220 of your DAI: $200 DAI + $20 DAI for the Liquidation Incentive (10% in this example).
Your new position after the liquidation: Deposit Value — $780 in DAI, Borrow Value — $200 in ETH
You can view the Liquidation Incentives for each asset by clicking on the asset in the “Network” tab of the app.
Preventing liquidations
The best way to protect yourself against liquidations is to understand how, why, and when they occur. 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.
Lending Incentives (RainMaker)
As an incentive for investors to supply BUSD to the lending network, the Wolf Den has supplied $WOLFIES into the RainMaker
Anyone who has supplied BUSD will now see 2 earning APY percentages.
The top will be the supply APY paid in BUSD.
The bottom is the distribution APY paid out in $WOLFIES.
This bonus will ONLY apply to those supplying BUSD.
Claiming your $WOLFIES
Pressing on the button with the $WOLFIES logo at the top right corner of the screen will bring up a popup that will allow you to claim your rewards.
AMA
As new information is added this supporting document will be updated, be sure to bookmark this page to get access to the updated information.
DISCLAIMER: These articles are for educational purposes only. Nothing in this article should be construed as financial advice or a recommendation to buy or sell any sort of security or investment. Consult with a professional financial adviser before making any financial decisions. Investing in general and options trading especially is risky and has the potential for one to lose most or all of their initial investment
