Lending Within the Cosmos Ecosystem
Soon, there will be more and more mechanisms developed over time to provide some additional flexibility to borrowers. This includes the ability to leverage Liquid Staking Derivatives when borrowing assets to earn some additional income that can be offset against interest payments.
DeFi within the Cosmos ecosystem is readying for its golden age with the breadth of primitives currently in development that will offer a large and wide offering to users. There’s a lot to be excited about from DEXes to money markets, perpetuals to options!
Lending markets in specific are seeing a large boom! Many new protocols have been launched, each with its own unique twist on things! Here is how Nolus Protocol does things differently!
Increased Capital Efficiency
Most lending protocols in the Cosmos ecosystem and the wider space leverage an over-collateralized model. This model sees borrowers receive a fraction of the collateral they deposit.
However, Nolus Protocol’s unique model allows it to provide capitally efficient loans of up to 150% of the collateral provided by borrowers. When a DeFi Lease is opened, the collateral and proceeds of the loan are locked in a smart contract instance.
While this reduces the flexibility of the loan, the greater capital efficiency allows borrowers to have more price exposure to any given asset.
Soon, there will be more and more mechanisms developed over time to provide some additional flexibility to borrowers. This includes the ability to leverage Liquid Staking Derivatives when borrowing assets to earn some additional income that can be offset against interest payments.
Method of Interest Recognition
Almost all lending protocols in the space today leverage an accrual basis for interest payments.
While interest payable by borrowers accrue over time, borrowers have no obligation to pay their outstanding interest (withstanding the risk of liquidation as the total debt of a facility combines both the initial debt and unpaid interest). This means that depositors are able to withdraw interest income up to the point where the money market is 100% utilized.
This can potentially manifest into a circumstance where a period of low-interest payments and high accrued interest income receipts (by depositors) can place upward pressure on the utilization rate and increase the interest rates on future borrows.
Contrastingly, Nolus Protocol leverages the cash basis for interest payments. Depositors receive interest income as and when interest payments are made by borrowers. Interest from DeFi Leases will be due for collection in specific periods which will provide a degree of consistency for depositor yields. If the interest amount is not paid promptly, it will be automatically deducted from the borrower’s active DeFi Lease positions.
Stablecoin Denominations
While most lending protocols structure their protocol with individual money markets for each type of collateral, Nolus Protocol uses one Liquidity Provider’s Pool consisting of stablecoins. In exchange for depositing stablecoins, depositors receive an interest-bearing receipt token to represent their share of the Pool.
All DeFi Leases on Nolus Protocol leverage the stablecoin deposits regardless of the asset borrowed. These stablecoins are converted to the desired asset through a combination of Interchain Accounts and DEXes within the Cosmos ecosystem.
Borrowed funds are locked within a smart contract. Upon execution, the interest rate for the DeFi Lease is fixed and is denominated in the asset borrowed. This means that individuals pay interest in the same asset they borrowed. Upon paying interest, the Protocol converts the proceeds to stablecoins using the same mechanism described above, and these funds are paid to depositors.
As all borrowers leverage the stablecoin deposits, depositors earn a normalized yield that factors the borrowing demand of all assets rather than just being exposed to the borrowing demand of a single deposited asset.
Flexibility and Other Advantages of a Standalone Appchain
By deploying on its own independent appchain, Nolus Protocol is able to be more tightly bound with the underlying appchain relative to smart contract-based lending protocols.
This could be used for many initiatives including a tax on transactions that are injected into the lending market to boost incentives.
Moreover, Nolus does not have to share block space with other applications on the blockchain. If the Protocol was a set of smart contracts on another blockchain, spikes in demand for other applications could delay the execution of transactions for the lending protocol. This could be critical and even result in the liquidation of loans that would have otherwise been prevented.
Closing Remarks
As you will have seen, there are a number of carefully chosen differences in how Nolus has been designed relative to competitors in the space.
With the upcoming launch of the DeFi Lease, we will be able to assess the advantages and disadvantages of this model in a live environment!
The next clear step is to continue evaluating how Nolus can grow the DeFi Lease through greater flexibility for users!
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