Aurox Lend is Aurox’s decentralized lending and borrowing platform. It is a fork of Compound’s DeFi platform with a few modifications. Aurox Lend is directly coupled with Aurox’s centralized order placement terminal called Aurox Trade. This allows lenders on the platform to supply cryptocurrencies and stablecoins to margin borrowers on the terminal. This is a property that is unique to Aurox, and allows us to offer a premium interest rate to lenders while at the same time offering a competitive rate to margin borrowers.
Below we will learn about some of the current challenges lenders and borrowers have to contend with, and how Aurox is able to solve some of these challenges using our novel approach to lending and borrowing.
Unreliable Interest for Lenders
Today’s DeFi lending and borrowing platforms are reliant on realtime market supply and demand resulting in erratic yields. It is not uncommon for yields on platforms like Aave and Compound to swing 25% in the span of a month. Oftentimes the yields are sub-par given the considerable exposure and risk.
Decentralized lending platforms are constrained in their risk mitigation capacity due to having no control over loaned capital. DeFi borrowing is truly permissionless, allowing any borrower to withdraw loaned funds off platform and use them as they see fit. Borrowers may subject themselves to substantial risk depending on the use of these borrowed funds, a risk that cannot be actively mitigated by current DeFi lending solutions.
To solve this, DeFi lenders require substantial collateral, oftentimes at 2x the borrowed amount. A borrower who wishes to borrow USD 200 in ETH, would be required, for example, to lock USD 400 in wBTC on a typical DeFi lending platform. This makes it expensive to borrow cryptocurrencies, requiring more collateral than what is being borrowed. For some borrowers, it may make more sense to simply acquire the cryptocurrency directly. For others, the amount of borrowed capital is limited, typically, to half of what is posted as collateral. Therefore, while borrowing demand might actually be higher, borrowers are always limited to a loan amount that is a fraction of their available holdings, resulting in an artificial limit to demand.
Since DeFi lenders are not integrated with any specific borrower, they are relegated to being generalists and can only charge rates that are commensurate with the broad market. During times of high demand, this can be rewarding to lenders, however, during times of low demand, the opposite is true, resulting in low yields. In general, cryptocurrency and stablecoin yields at DeFi lending and borrowing platforms are less than what is available by their CeFi counterparts such as BlockFi and Celsius.
Competitive Interest with Aurox Lend
Aurox Lend is designed to provide some of the most competitive yields for lenders in the DeFi space. While the rates will be determined by actual market supply and demand, just as it would for any other DeFi lending platform, Aurox Lend couples lenders with one of the highest paying borrower categories — margin borrowers.
This is possible due to the direct integration with Aurox Trade, our trading terminal which taps into liquidity of several centralized exchanges. Where other DeFi lending platforms are unable to secure loaned funds other than through posted collateral, Aurox can restrict withdrawal of funds from its trading platform, and can also force the liquidation of borrowed funds in order to cover market declines.
The above allows borrowers access to 4x margin loans, providing enough leverage to adequately meet market demand, while providing lenders with a reliable source of high demand, and high interest loans. Furthermore, the high margin ratio is likely to attract high-performance traders who are willing to pay higher interest premiums.
Aurox intends to lend cryptocurrency on margin at a competitive rate. Below is a comparison of current daily and annual margin lending rates across popular exchanges. From the below table we can see that annual rates vary greatly between exchanges, but even the most competitive rates are still in the double digits. Provided Aurox can lend at a rate similar to the most competitive of these exchanges, the return to lenders should be far greater than what is available through other DeFi lenders.
To put this in perspective, we take the APY earned by lenders on popular platforms Compound and Aave and compare them with the above hypothetical market return on Aurox. Assuming a spread of 15% to account for a reserve, and 10% in fees, the net APY to a lender is indicated in the table below.
Advantage to Margin Borrowers
Borrowing directly from Aurox for margin allows a trader to achieve substantially greater leverage than if they were to perform the same action on a DeFi lender like Compound.
Too Good to Be True?
While Aurox is one of the first projects to implement decentralized lending in a highly specific way, the concept of loaning capital to high interest paying borrowers while minimizing collateral occurs elsewhere in the cryptocurrency lending space.
Centralized finance lenders such as BlockFi and Celsius, for example, are already doing this. The advantage a centralized lender has over a decentralized lender is that they can collect specific information on their client such as credit worthiness, in order to determine the ability to pay back a loan. They can also pursue collection measures that are unavailable to DeFi lenders — whom, because of their permissionless nature, have no information on their borrowers.
Since Aurox Trade is a centralized order placement engine that utilizes the same process to determine margin eligibility for its customers, it has the potential to provide leveraged capital, while offering similarly high interest rates to lenders.