Liquidation Free Loan

What is Liquidation Free Loan?

Liquidation Free Loan is a new feature for cDOT/cKSM holders that let users use their cTOKEN as collateral to borrow more DOT/KSM. This allows users to leverage up their positions or participate in more crowd loans. Since 1 cDOT/cKSM can eventually be used to redeem exactly 1 DOT/KSM respectively, it allows the loan to be free of liquidation risk as there is no risk of price divergence in a longer time frame.

What is the benefit of Liquidation Free Loan?

The biggest benefit of Liquidation Free Loan is the ability for users to leverage up their DOT/KSM positions, without any risk of liquidation. Users can borrow more DOT/KSM using their cDOT/cKSM in order to make alternative investments to gain more profit, without having to worry about any liquidation risks which is especially important in volatile markets.

How to take out a Liquidation Free Loan?

It works exactly the same as ‘regular’ loans on Money Market. Simply deposit your cTokens into Money Market and use it as collateral. You can then immediately take out a DOT/KSM loans based on the value of your cTokens.

How can it be “Liquidation Free”?

cDOT/cKSM that users received after participating in crowd loans represents the DOT/KSM tokens that are locked. Once the lease period is over, user can use these cTOKEN to redeem their DOT/KSM back at a fixed exchange rate of 1:1. As a result of this eventual fixed rate exchange, loans can then be issued with no risk of liquidation as the value of the collateral and the value of the loan will always be correlated at the end of the lease period (up to 96 weeks). Therefore users using cDOT/cKSM as collateral can borrow DOT/KSM respectively without liquidation risk.

How is the price for cDOT/cKSM determined?

Due to the relatively low liquidity of cDOT (worth around 19 million DOT compared to over a billion DOT in total supply), cDOT is can be quite vulnerable to significant price slippage and high price volatility as a result. For liquidation free loans, a custom price equation is implemented for cDOT/cKSM. This is used to calculate liquidation free limits for loans.
  • r: is the max borrow rate in market
  • T: is the time from now to the slot lease end.
The price for cDOT to be used in Money Market for liquidation free loan will be calculated based on the equation above, and is independent from the price generated from AMM due to market conditions. This allows cDOT to be priced correctly for Money Market purposes, without the risk of price volatility of the market.

Which tokens can be used for Liquidation Free Loan?

Tokens that can be used for liquidation loans will have a special diamond icon next to them in the app.
At the moment you can only use your cDOT/cKSM and LP-cDOT/cKSM tokens (acquired by adding cKSM/cDOT liquidity to AMM) to borrow DOT or KSM. The team is working towards adding more assets to be used as liquidation free collateral in the future.