Borrowing USDx (USDx Minter)
A brief description of the borrowing functionality within USDx
Last updated
A brief description of the borrowing functionality within USDx
Last updated
What is 'Borrowing' in the context of USDx?
USDx offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan). Instead of selling Collateral (TitanX, DragonX) to have liquid funds, you can use the protocol to lock up your collateral, borrow against it to withdraw USDx, and then repay your loan at a future date.
For example: Borrowers speculating on future Collateral price increases can use the protocol to leverage their Collateral positions, increasing their exposure to price changes. This is possible because USDx can be borrowed against (for example) TitanX, sold on the open market to purchase more TitanX — rinse and repeat.*
*Note: This is not a recommendation for how to use USDx. Leverage can be risky and should be used only by those with experience.
The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the last redemption time. For example: If more redemptions are happening (which means USDx is likely trading at less than 1 USD), the borrowing fee would continue to increase, discouraging borrowing.
To borrow you must open a Position and deposit a certain amount of collateral. Then you can draw USDx up to a collateral ratio of the configured MCR (Minimum Collateral Ratio). A minimum debt of 2,000 USDx is required.
A Position is where you take out and maintain your loan. Each Position is linked to an Ethereum address and each address can have just one Position per Collateral type. If you are familiar with Vaults or CDPs from other platforms, Positions are similar in concept.
Positions maintain two balances: one is a collateral balance, and the other is a debt denominated in USDx. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Position’s collateral ratio changes accordingly. You can close your Position at any time by fully paying off your debt.
Every time you draw USDx from your Position, a one-off borrowing fee is charged on the drawn amount and added to your debt. Please note that the borrowing fee is variable (and determined algorithmically) and has a minimum value of 0.5% under normal operation. The fee is 0% during Recovery Mode. A 200 USDx Liquidation Reserve charge will be applied as well, but returned to you upon repayment of debt.
Another consideration is the price of USDx at the time of repayment. If at the time you want to repay your loan USDx is trading at $1.02 on the market and you need to buy it, you are incurring a 2% 'fee'. You can avoid this by having your borrowed funds readily available or by being able to wait for USDx to return to peg.
USDx uses a combination of dynamic base rate fee suggestions, collateral settings, and market volitility estimation to feed fee rates back into the protocol.
The borrowing fee is added to the debt of the Position. The loan fee rate is confined to a range between 0.5% and 5%, or a custom min/max fee setting, and is multiplied by the amount of liquidity drawn by the borrower.
For example: The borrowing fee stands at 0.5% and the borrower wants to receive 4,000 USDx to their wallet. Being charged a borrowing fee of 20.00 USDx, the borrower will incur a debt of4,220 USDx after the Liquidation Reserve and issuance fee are added.
Loans issued by the protocol do not have a repayment schedule. You can leave your Position open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.
This is the ratio between the Dollar value of the collateral in your Position and its debt in USDx. The collateral ratio of your Position will fluctuate over time as the price of the underly collateral changes. You can influence the ratio by adjusting your Position’s collateral and/or debt — i.e. adding more collateral or paying off some of your debt.
The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode). This is a collateral specific parameter that is set by the protocol Guardian. So if we assume an MCR of 110%, and your Position has a debt 10,000 USDx, you would need at least $11,000 worth of collateral to avoid being liquidated.
To avoid liquidation during Recovery Mode, it is recommended to keep ratio comfortably above the CCR (Critical Collateral Ratio).
You lose your collateral as your debt is paid off through liquidation, i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of (in the case of MCR of 110%) 9.09% (= 100% * 10 / 110) of your collateral’s Dollar value.
When you open a Position and draw a loan, 200 USDx is set aside as a way to compensate gas costs for the transaction sender in the event your Position being liquidated. The Liquidation Reserve is fully refundable if your Position is not liquidated, and is given back to you when you close your Position by repaying your debt. The Liquidation Reserve counts as debt and is taken into account for the calculation of a Position's collateral ratio, slightly increasing the actual collateral requirements.
When USDx is redeemed, the Collateral provided to the redeemer is allocated from the Position(s) with the lowest collateral ratio (even if it is above the MCR). If at the time of redemption you have the Position with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.
The USD value by which your collateral is reduced corresponds to the nominal USDx amount by which your Position's debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected Positions, making them less risky.
Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off a Position's debt are called full redemptions. In such a case, your Position is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.
By making liquidation instantaneous and more efficient, USDx needs less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.
If Positions are liquidated and the Backstop Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.
