Borrowing (Selling Credit)

Borrowing can also be viewed as an exchange of credit for cash, or "selling credit". These terms will be used interchangeably throughout these docs.

Borrowing (Selling Credit) with a Market Order

Borrowing

Borrowers simply pick the amount they would like to borrow, the amount of collateral they would like to deposit (which determines their collateralization ratio), and the due date for their loan.

They are then matched with the lowest fixed rate for that chosen quantity and maturity.

Orders of larger sizes may span multiple lender offers and will receive a weighted average rate.

Selling Existing Credit with a Market Order

Users may sell credit (their expected cash flows from lending) to other users. This allows lenders to exit their positions to other lenders.

Speculators or advanced users may also trade credit as a way to speculate on yields, or in an attempt to earn on the bid-ask spread by buying cheap credit (lending at low rates), and selling the credit high, and repeating this to compound earnings.

Borrowing (Selling Credit) with a Limit Order

Borrowers may also opt to borrow as a limit order. While some users may use this to patiently lock in a lower-than-market rate, it will likely be primarily used to sell existing credit.

Selling Existing Credit with a Limit Order

A bid to borrow doubles as an offer to sell existing credit, which is automatically flagged for sale if the user has set a limit borrow bid. You can think of the inverse of a bid to borrow as being the quoted price to sell credit.

Users may opt to unenroll all credits as being flagged for sale if a borrow bid is set, or may delist specific credits via the Positions page.

Borrower Early Exits

Borrowers may exit their loan before the due date via the borrower bid side of the order book. When this happens, a replacement borrower is appointed and the initial borrower pays the discounted cash flow value based on the interest rate of the replacement borrower.

For example, Jim borrows 100 USDC at 5% interest for 12 months, so the future value of his loan is 105 USDC (the amount he will need to repay at maturity). After 6 months, Jim exits to another borrower, Kline, with an interest rate of 4%. Kline expects to pay back 105 USDC for borrowing 105 / (1 + 0.04 * 6/12) = 102.9 USDC. Jim pays Kline 102.9 and avoids paying the full 105 USDC future value to unlock his collateral, thus saving 42% of the full-term interest. Note: fees are ignored in the examples for simplicity.