Offsetting Debt with Credit

Users may assign credit they own to their borrow positions, effectively pointing their future cash flows at their creditor, reducing their debt, and allowing them to withdraw their ETH collateral or eliminate liquidation risk.

For a credit to be eligible, it must have a due date sooner than that of the debt position being reduced, and it must correspond to a healthy borrower (not eligible for liquidation).

Examples of Reducing Debt with Receivables

Example A

Bob lends with future value 105 USDC due month 3. He then borrows 85 USDC due month 4 using his month 3 receivable as collateral. When the loan due month 3 is paid back to Bob, 85 of the 105 USDC will remain locked to guarantee repayment of his loan due month 4. Bob may then still offer to lend the 85 USDC before his due date month 4, or he may lend out the 20 USDC for any maturity.

Example B

In another example, let’s say Alice borrowed 1000 USDC at 4% with 2 ETH as collateral for 13 months. Subsequently, there is an increase in interest rates. She then lends 1000 USDC at 8% interest for 12 months, meaning she has a 1080 USDC receivable due in 12 months. Since the due date for borrowing is after the date she expects the 1080 to be paid back, and the 1080 is greater than the ~1043 she owes, she can withdraw her 2 ETH, replacing her “real ETH collateral” with her expected cash flow.

Read more about the risks and mechanics of cash flow accounting in the technical sections.