Money Market Guide
Lending How to lend tokens? Head to the “Lend” section of Money Market and click on any token you wish to supply. Currently Money Market supports a wide range of tokens, including sDOT/sKSM (from liqu
Head to the “Lend” section of Money Market and click on any token you wish to supply. Currently Money Market supports a wide range of tokens, including sDOT/sKSM (from liquid staking of DOT/KSM), LP tokens (from adding liquidity on Swap), cDOT/cKSM (from participating in crowdloans) and many more.
Enter the amount, click “Lend” and confirm the transaction. Once the transaction is confirmed, you have successfully supplied tokens and begin earning interests.
When lending tokens, there are two components of interests that makes up the Supply APY that are seen on the app:
- 1.Lending APY This is the interest for lending assets on the Money Market, paid in the same token that is being lent. The lending interest rate is dynamically determined by the supply and demand. Therefore, the borrow and supply interests could vary in different blocks. You can find the latest supply interest APY on the app and the additional farming rewards APY on the app.
- 2.Farming APY This is the incentives provided by Parallel Finance for locking up assets in the Money Market paid in PARA tokens. The interest rate varies by token and it is regularly adjusted based on market demand.
There are no minimum or maximum deposit limits. But there are chain transaction fees that must be taken into account when borrowing.
After you have supplied tokens for lending, simply turn on the “Collateral” toggle for the chosen token and confirm the transaction. Once the toggle is on (showing the blue colour), the token can then be used as a collateral for borrowing.
Please note that not all assets can be used as collateral. For more info on which asset is accepted, please check Risk Parameters.
Borrowing allows you to receive liquidity without closing your position (selling). This is particularly useful if you are invested in the long term future of the asset, and borrowing allows you to capture the potential upside while maintaining liquidity.
Once collateral has been supplied (see previous section on supplying assets as collateral), you can select any assets you wish to borrow on the “Borrow” section. Enter the amount under the “Borrow” tab for the asset, which is dependent on the amount of collateral deposited. Once the transaction is confirmed, you will receive the borrowed asset and begin accruing interest.
The amount that can be borrowed is dependent on the value of the collateral that has been deposited. This is also reflected in the “Health Factor”, which cannot go below a certain threshold. All the relevant parameters can be found here.
Go into the asset with an outstanding debt under “Borrow” in Money Market. Since you must repay your loan in the token as the one that was borrowed, you will see a total “Borrowing” amount under the “Repay” tab. Simply enter the amount you wish to repay and approve the transaction. Once the transaction is confirmed, your outstanding balance will go down and the health factor will increase (freeing up “Borrow Limit”).
The interest rate in Parallel finance is dynamically determined by the supply and demand of the market (see detailed interest rate model here). The latest borrowing rate is shown on the app.
There is no deadline or fixed time period for repayment. Provided the position is safe (see health factor) from liquidation, the borrowed position can remain open indefinitely. However, it must be noted that interests accrue over time therefore negatively affecting the health factor. Therefore interests accrued must be taken into consideration when considering when to repay.
Health Factor represents the price ratio of your borrowed asset and your collateralized asset. It shows how close to liquidation your borrow position is. When the Health Factor reaches one, liquidation is triggered to begin repaying outstanding debt. The higher the health factor is, the ‘safer’ the position is from liquidation.
Equation for Health Factor
For example, assuming 100 sDOT ($1000 USD worth) was deposited as collateral with a sDOT liquidation threshold of 55%. Then the user then borrowed 50 DOT ($475 USD). Therefore giving the user a HF of 1.15. Even though this HF is close to 1 (which triggers liquidation), since sDOT and DOT prices are highly correlated, the risk is relatively small. However the interests accrued still poses a risk to the HF.
Using the same example above of a collateral value of $1000 USD of sDOT, with $475 USD worth of DOT borrowed. If the user accrued $75 dollars worth of interests, then the HF would reach 1. Therefore users should always be aware of the impact of accrued interests on the overall position health.
Even though there is no repayment deadline, the health factor can drop due to a variety of reasons such as token prices and interests accrued as mentioned above. When the Health Factor drops to risky level (starts approaching 1), users can either repay the loan fully or partially to reduce “borrowed value” or they can deposit more tokens as collateral to increase “collateral value”. Doing either can increase Health Factor thereby reducing liquidation risks.
When your health score continues to fall and reaches 1, liquidation will be triggered to ensure the collateral position covers the outstanding loan. The system will begin to liquidate your collateral until the debt is paid, any remaining collateral will be returned to you.