Borrow & Lend
Facilitate non-liquidatable loans on NRV collateral via Ruler Protocol.
Collateralization is when an asset with agreed upon value, such as a cryptocurrency, is used to secure a loan against that value. The borrower pays interest for the privilege of being able to secure the loan and leverage the value of their collateral, and the lender profits from that interest at the end of the term period. If the borrower does not pay back the loan (defaults), the lender keeps the collateral.
In order to protect the lender in cases where the underlying collateral may be a volatile asset, there is often a liquidation price associated with the collateral. When the value of the collateral falls below this liquidation price, the loan is considered defaulted and the collateral is sold at market value so that the lender can cover their risk. Nerve's integration with Ruler Protocol eliminates this risk for borrowers, allowing users to take non-liquidatable stablecoin loans on their NRV collateral.
To understand the mechanics of this DeFi primitive you should read the guide to Ruler Protocol, but, essentially, Ruler is able to provide borrowers with non-liquidatable loans is by transferring risk to lenders. How is this so?
All loans at Ruler are for a fixed duration - typically until the end of the next monthly cycle, so usually for a maximum of 31 days. The interest rate paid by the borrower and received by the lender is set by the market and can vary significantly within each loan period as a function of supply and demand, but the rate is set for the period of the loan once it has been secured. The ratio of the value of the collateral versus the loan is called the "mint ratio" and is set at the protocol level for each type of collateral when the term period begins.
For a borrower, the risk assessment is simple - if the value of the collateral is higher than the mint ratio, then it is more valuable than the loan, and an economically rational actor will pay back their loan before the default date to recover their collateral. From the perspective of the lender, a borrower defaulting in this situation is a positive outcome. If the borrower defaults and forfeits their collateral, but its value exceeds that of the loan provided by the lender, then the lender has been provided with additional yield.
However, if the value of the collateral is lower than the mint ratio as the term approaches expiry, then borrowers have no incentive to pay back the loan, and they will likely default. At this point, the lenders will be the ones assuming the cost of fluctuations in the value of the underlying asset, and borrowers will have essentially exercised a put option set by the original mint ratio on their collateral.
If you would like to use Ruler Protocol to collateralize and borrow stablecoins against your NRV, then please read up on their documentation and also ask any questions you might have in their Telegram or Discord before getting started. Always DYOR when interacting with a protocol that is new to you. Once you have done that, here are the steps to borrowing off your NRV:
- 2.Under the "Borrow" tab, select the amount of NRV that you want to collateralize, as well as the stablecoin you would like to take out your loan in. Note the annualized interest rate that you are being charged, and the USD value of the interest that you will be charged when taking out the loan - this is assumed based on the number of rcTokens you receive, but is not paid until you redeem them and realize that cost.
- 3.Once you confirm the borrowing transaction, you will now have your borrowed stablecoins as well as rrTokens that represent your NRV collateral. You must pay back your loan before the expiry date using these rrTokens and the indicated amount of stablecoins to unlock your collateral. You may also use rcTokens, generated from lending through Ruler or by swapping for them on the open market, to pay back your loan instead of using stablecoins.
Collateralizing your NRV to take out a non-liquidatable loan is noteworthy enough, but there are a number of other instruments that Nerve's integration with Ruler Protocol enables users to enjoy. You can also:
Lend BUSD, USDT, or USDC to borrowers putting up NRV as collateral, earning rcTokens based on market interest rates for doing so. These rcTokens can be staked in Ruler's farms to earn NRV, RULER, rcToken swap fees, and forfeited collateral after term expiry. They can also be redeemed for interest paid by borrowers after term expiry.
Mint rcTokens directly from BUSD, USDT, or USDC according to the mint ratio , which may be more or less advantageous than obtaining rcTokens at market rates by lending your stablecoins. These rcTokens do not grant access to interest paid by borrowers, but can be staked to farm NRV, RULER, rcToken swap fees, and gain access to forfeited collateral after term expiry.
Mint rcTokens directly from NRV collateral, in effect using your NRV to take an interest-free loan based on the mint ratio which is then used to lend stablecoins to other borrowers. You will receive rcTokens and rrTokens. The rrTokens and the indicated amount of rcTokens or stablecoins are required to unlock your collateral before the term period expires - otherwise it will be forfeited. You can stake the rcTokens you received in Ruler's farms to earn NRV, RULER, rcToken swap fees, and forfeited collateral after term expiry, but they do not grant access to interest paid by borrowers.
Video courtesy of cryptocorgi555 (https://twitter.com/RulerProtocol/status/1399060998485680134)