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Efficient use of Collateral

Fixed-term borrowing and Positions Monitoring System together enable efficient collateral management for the borrowers

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Key Takeaways

  • SmartCredit.io calculates the minimum collateral needed for a 5% liquidation probability, letting borrowers use less collateral than on money-market funds like Aave or Compound.
  • Fixed loan terms make precise collateral calculations possible; variable-term protocols cannot offer this.
  • The Positions Monitoring System notifies borrowers via Telegram when liquidation probability rises, so they can add collateral or repay early.
  • Money-market funds force borrowers to use high arbitrary collateral ratios because they lack loan maturity information.

Let's start with two key benefits of fixed-term borrowing:

  • Efficient use of collateral - users can manage their loan positions effectively and can borrow more on the same collateral amount.
  • Predictability - borrowers will know in advance their cost of capital.

SmartCredit.io manages collateral efficiently, which results in efficient collateral usage.

  • Collateral amount for the loan is calculated with the 5% liquidation probability. Calculation is based on the loan term and collateral volatility.
  • Borrower can connect their address with their Telegram account and receive notifications from the Positions Monitoring System.
  • If the liquidation probability increases (for example, collateral value declines or collateral volatility increases) then per every 5% increase user will receive a telegram notification per active loan.
  • For example, the user would receive notification at 15%, 20%, 25%, and so on.
  • Borrower could then decide either to increase the collateral and reduce the liquidation probability.
  • Or borrower could decide to pay back the loan.

Let's look first at how Money Market Funds (Aave, Compound, etc) handle the collateral:

  • Money Market Funds have their hard-coded liquidation ratios - if collateral value sinks below the liquidation ratios, the loan will be liquidated. These ratios are ca on 115%-120% and this results in high revenues for the liquidators (hint - SmartCredit.io never earns on the liquidations. Borrowers collateral are borrower funds)
  • But borrowers choose arbitrary collateral amounts because there are no tools to help borrowers to select which amount of collateral to use
  • And even worse, these tools would not make any sense because the Money Market Funds do not know the long term.

Money Market Funds do not have the technical ability to offer efficient collateral usage to their borrowers - they do not know the loan maturity or have Position Monitoring Systems. This forces the borrowers to use very high collateral ratios in the Money Market Funds, resulting in low collateral usage efficiency.

SmartCredit.io, on the other hand, knows the loan terms and actively uses Position Monitoring System. This results in high efficiency of collateral usage.

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