How Lenders can earn with RociFi
A few days away from RociFi’s launch on Polygon we’d want to introduce how RociFi’s under-collateralized lending markets will work for Lenders.
Lenders on RociFi can earn high and stable APY by depositing capital into one of our three lending pools based upon their risk tolerance.
At the point of launch, the asset that lenders can deposit on RociFi is USDC on Polygon.
There are 3 lending pools on RociFi
Unlike other DeFi protocols providing under-collateralized loans, RociFi doesn’t require deposit lockup, i.e. lenders can withdraw at any time without restrictions.
The interest that lenders earn on RociFi depends on various factors
A. Protocol behaviour
- Utilization rate, i.e. total borrowed from total deposited at the given point of time
- Repayment rates, i.e. how well borrowers repay 30-days fixed-rate under-collateralized loans. If borrowers’ repayment rate is too low, lenders might end up at loss
B. Lenders’ strategy and behavior
- At what time of repayment cycle lenders deposit and when they withdraw
C. External factors
- Price of collateral at the time of liquidation
Since all these factors are not possible to predict, we communicate about APY in two terms
- Projected APY — various outcome scenarios based on the variables above
- Effective APY — actual interest earned by lenders as the result of performance of the pools
Projected simulated capital investment outcomes for the lenders into the Middle-risk pool (Scores 4–6, APR 24–36%) under-collateralized pools can be seen below.
Table 1: Optimistic scenarios. Calculations are for 12-months deposit. Non-compound interest. Assuming same loan sizes, same repayment rates and same pool utilization during deposit period.
Table 2: Pessimistic scenarios. Calculations are for 30-days deposit. Non-compound interest. Assuming same loan sizes, same repayment rates and same pool utilization during deposit period.
Since the key factors like utilization and repayment rates that affect interest rates paid out to lenders are difficult to predict, we must talk about effective APY, i.e. actual interest earned by lenders as the result of the performance of the pools, in terms of the protocol’s pool mechanics and ‘debt token’ economy.
Effective APY is the difference in price of the ‘debt token’ (i.e. the token minted at the point of the deposit, that represents lenders’ share of the pool) at the time of withdrawal from the time of the deposit.
EAPY = DT_PRICE_WITHDRAWAL / DT_PRICE_DEPOSIT / DAYS_FROM_DEPOSIT_TO_WITHDRAWAL * 365
For example, if at the time of the deposit, debt token costed DT_PRICE_DEPOSIT = $1.00 and the time of withdrawal DT_PRICE_WITHDRAWAL = $1.10 and withdrawal has happened 60 days after the deposit, then, EAPY = 6,69%
To be able to calculate effective APY, lenders need to follow debt token economy and pools mechanics that works like this
- Upon depositing DEPOSIT_AMOUNT payment tokens, DT_TO_MINT of debt tokens are minted and transferred to the Depositor’s wallet.
- Let’s call the total amount of debt tokens in the Depositor’s wallet created as the result of all deposits as DT_AMOUNT.
- DT_TO_MINT = DT_TOTAL_SUPPLY * DEPOSIT_AMOUNT / CURRENT_POOL_VALUE
- The table below explains how various lending scenarios affect CURRENT_POOL_VALUE and DT_TOTAL_SUPPLY values that affect amount to withdraw
- After minting debt, the token’s total supply is increased to DT_AMOUNT + DT_TO_MINT.
- Holding DT_AMOUNT debt tokens entitles depositors to owning a share of the respective pool calculated as DT_AMOUNT / DT_TOTAL_SUPPLY.
- Withdrawing (or burning) DT_AMOUNT of debt tokens allows depositors to withdraw CURRENT_POOL_VALUE * DT_AMOUNT / DT_TOTAL_SUPPLY payment token from the pool, given that the pool currently has enough of the asset tokens.
- Therefore, effective APY will be calculated as the difference between CURRENT_POOL_VALUE / DT_TOTAL_SUPPLY at the time of the deposit and repayment
- If the pool is dry for the asset tokens (f.e. in case of nearly 100% utilization), then the depositors have to wait for other depositors to add to the pool or for repayments to come in, before they can withdraw.
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RociFi — under-collateralized credit for Web3