Lending (Buying Credit)

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

Lending (Buying Credit) with a Limit Order

Lenders deposit USDC, which earns a variable rate via Aave until matched with a borrower. At the same time, they create a yield curve offer specifying the rate that they would like to receive across different maturities.

For example, a lender may specify a continuous curve defined by the points (1 month, 2.5%), (3 months, 3%), and (1 year, 5%). If a borrower then wanted to borrow for 4 months, they would pay ~3.2% if matched with this lender.

Lenders may exit positions early if desired by selling credit through the primary market of other willing lenders.

If borrowers fail to repay by the due date, the lender is repaid, and the borrower is liquidated or replaced.

Lending (Buying Credit) with a Market Order

Users may also submit market orders to buy credit, either filling a bid to borrow or purchasing an existing credit flagged for sale via limit order.

This is helpful if you want to quickly lock in a fixed rate as a lender, or when speculating on interest rates dropping.

Lender Early Exits

Lenders may exit their obligations early by selling their credit to the lending offer side of the order book, provided there is sufficient liquidity. Upon early exit, a replacement lender is appointed and this lender pays the discounted cash flow value based on the interest rate of the replacement lender for the loan's remaining term.

For example, Jim lends 100 USDC at 5% interest for 12 months, so the future value of the loan is 105 USDC (the amount he'll receive 12 months from now). After 6 months, Jim exits to another lender, Kline, with an interest rate of 4%. Kline will now receive the 105 USDC from the borrower at maturity, and thus now has to pay Jim the discounted cash value 105 / (1 + 0.04 * 6/12) = 102.9 USDC. Kline's 102.9 goes to Jim now, who realizes a 2.9% profit on his initial 100 he lent out, and Kline collects his 105 (including the 2.1 USDC profit) upon repayment by the borrower. Note: fees are ignored in the examples for simplicity.