Parallel Liquidation-Free Loan
One of the hottest topics of discussion in DeFi is capital efficiency and how users can increase the utilization rate of their assets for maximum gains. An enticing and unique approach to this is COLLATERALIZED LENDING — Many DeFi protocols have proposed and developed several concepts around this approach including undercollateralized, overcollateralized, and uncollateralized loans. However, these approaches are flawed because they come with significant risk due to the volatility of the market — users can get liquidated real quick as the market takes a downturn.
Parallel Finance being a user-focused DeFi protocol introduces Liquidation-Free loans. A model that transforms a risky collateralized loan into a safe one that allows users to borrow assets — DOT without the risk of liquidation.
Parallel Liquidation-Free Loan
This approach entails no liquidation risk and also allows users to maintain liquidity by borrowing DOT using the cTOKENS (cDOT/cKSM) they receive after contributing DOT via Parallel Crowdloan. cDOT has no specific use case except that it can be used to redeem DOT at the end of the crowdloan lease period (96 weeks) at a ratio of 1:1. Interestingly, this makes it a good fit as collateral to borrow DOT. This loan is 100% protected against liquidation, gives users more DOT to participate in more crowdloans or leverage since Parallel runs a composable DeFi ecosystem, and it works like a regular loan on the Money Market.
DOT loan is protected by the amount of cDOT a user has. If cDOT is the only collateral available, there will be no risk of liquidation since the entire loan is protected. However, if there is a mix, only the portion of the loan equivalent to the value of the regular collateral is at risk of liquidation.
In a situation where the user has multiple collaterals, the ‘liquidation-free limit’ will be used first. Here’s how it plays out:
- Imagine you have two credit cards, one is covered by cDOT (liquidation-free), while the other is covered by PARA or other uncorrelated assets
- When a user takes out a loan, it will first be charged to the cDOT card, and only when the card is maxed out that the card covered by PARA will be charged.
This is better explained in the table below:
In the Both Regular + Liquidity free section, if a user has a total balance of $27.5 to be used as collateral ($25 worth of PARA and $2.5 worth of cDOT) and he wants to borrow $13.75, the borrowed amount is first deducted from the Liquidity Free Limit (cDOT balance)(which turns it to 0) and the balance (11.75) is deducted from the Borrow Limit (PARA balance) which turns it to $13.75.
In a situation where the amount to be borrowed is $2, it is deducted outrightly from the Liquidity Free Limit which turns it to $0.5 and the Borrow Limit ($25) is kept intact.
Health Factor
Health Factor is only applicable to other forms of loans and it represents the price ratio of a user’s borrowed asset and collateralized asset. It shows how close to liquidation the user’s borrow position is. When the Health Factor reaches one, liquidation is triggered to begin repaying outstanding debt. The higher the health factor is, the ‘safer’ the position is from liquidation.
The health Factor ratio is determined by the market price of all the assets involved (collateralized assets and outstanding debt), as well as the risk parameters involved which can be found here.
Which tokens can be used for Liquidation Free Loan?
Tokens that can be used for liquidation loans will have a special diamond icon 💎 next to them in the app.
At the moment you can only use your cDOT and LP-cDOT tokens (acquired by adding cDOT liquidity to AMM) to borrow DOT. The team is working towards adding more assets to be used as liquidation-free collateral in the future.
Beyond enabling liquidation-free loans, Parallel creates more composability by enabling users to optimize strategies for their individual needs. Parallel’s approach to liquidation-free loans using cDOT gives users even more flexibility and opportunity and the end result is that users gain access to liquidity by borrowing against their assets, but without the risk of liquidation, enabling improved capital efficiency and better risk management.
How the Price of cDOT is Determined
Due to the relatively low liquidity of cDOT (worth around 19 million DOT compared to over a billion DOT in total supply), cDOT is can be quite vulnerable to significant price slippage and high price volatility.
For liquidation-free loans, a custom price equation is implemented for cDOT. This is used to calculate liquidation-free limits for loans:
Where:
- r: is the max borrow rate in the market
- T: the time from now to the slot lease end.
The price for cDOT to be used in Money Market for the liquidation-free loan will be calculated based on the equation above, and it is independent of the price generated from AMM due to market conditions. This allows cDOT to be priced correctly for Money Market purposes, without the risk of price volatility in the market.
About Parallel Finance
Parallel Finance is a user-focused DeFi protocol that has evolved to become a hub for DeFi use cases and solutions. It features a suite of DeFi super dapps that include Staking and v2 Decentralized Crowdloan. The platform is committed to building a decentralized future that empowers the community to increase DeFi capital efficiency, security, and accessibility.
We are one of the largest parachains in the Polkadot space with over $700M+ TVL and 200K+ active users and have some of the best investors including Sequoia, Founders Fund, Coinbase, Polychain, etc. The platform has a rapidly growing global team of over 90 doers from top organizations in and outside the cryptocurrency space, including The World Bank Group, Dash, Crypto.com, ChainLink, Meta, Polygon, Ledger, JP Morgan, Standard Chartered, Amazon, BlockFi, etc and we are still hiring!
Stay in touch with us.
Website: https://parallel.fi
Twitter: https://twitter.com/ParallelFi
Telegram: https://t.me/parallelfi_community
Discord: https://discord.gg/buKKx4dySW
