The Loan-to-Value (LTV) is the ratio of a loan to the value of the collateral deposited in the Money Pool. The LTV is determined by the quantity of collateral and the liquidity of the entire Money Pool. If the LTV is 66% and the value of the assets deposited by a user is 1 ETH, the user can borrow other cryptoassets (Dai, USDT, etc.) equivalent to the maximum value of 0.66 ETH.
Liquidation is the process of automatically selling the collateral and recovering the loan to the Money Pool when the collateral coverage ratio is below the “Loss Cut Ratio.” Since loans are generated on the basis of deposited collateral, if the loans generated exceed the value of collateral, the risk associated with the Pool increases rapidly. Therefore, the Money Pool must be maintained so that the total loan amount does not exceed the total value of assets deposited as collateral.
When liquidation occurs, the collateral deposited by the borrower is forcibly sold. Of the sales total, the loan value is transferred to the Money Pool in order to supply liquidity, and the remaining amount is transferred to the lender. In such cases, part of the difference consists of penalties. The money is paid to participants in the liquidation process as rewards.
The liquidation process is carried out with both loans backed by real assets and cryptoassets. In each case, there are participants who participate in the liquidation process so that liquidation can be executed and rewarded to maintain the stability of the Pool. Liquidation of real assets involves various contract procedures and is highly decentralized because there are various participants in the real world. The liquidation process of cryptoassets as collateral can be executed transparently on-chain through smart contracts.
“Loss Cut Ratio” is the point at which liquidation occurs. The collateral coverage ratio (CCR) compares the value of the collateral to the loan amount. It is expressed as the ratio of the collateral value and the loan amount. If market conditions fluctuate rapidly or ELYFI is not operating smoothly due to excessive loans, the liquidation procedure is executed.
A portion of the sales generated by the liquidation process is used to repay the loan, and the difference is transferred to the borrower. However, part of the difference constituting a penalty is paid to participants in the liquidation process as rewards. Therefore, before liquidation occurs, the lender must check the liquidation threshold and the amount of the collateral currently deposited in the Money Pool, and deposit additional collateral or repay a portion of the principal if necessary so that liquidation does not occur.
The value of ABTokens deposited as collateral is guaranteed by the collateral service provider. However, liquidation of real assets may occur in the following two situations:
- When a borrower has not paid off the principal and interest after the loan expires.
- When the loan amount exceeds the collateral value of the ABToken due to an increase in the price of the loaned cryptocurrency.
Liquidation of real assets is carried out through various entities such as the NPL Management Ltd Open Market and collateral service providers. Loans are recovered to the Money Pool through liquidation of real assets, and NPL Management Ltd can receive part of the difference between the loan and the liquidation amount of the collateral as a reward when participating in liquidation.
1.Listing ABTokens on the Open Market
If borrowers do not transfer a loan principal to the Money Pool by the maturity date recorded in the ABTokens, the tokens are automatically listed on the NFT Open Market.
2. Purchase of ABTokens
NPL buyers purchase ABTokens listed on the Open Market. At this time, NPL buyers can purchase the ABTokens at a discounted price based on the content of the pre-contract.
3. Transfer of ABToken Disposal Value
When sales of the ABTokens that NPL buyers paid for are transferred to the Money Pool Contract, loans linked to the ABTokens are closed out at the same time as the loans are repaid.
4. ABToken Offers
NPL buyers offer the purchased ABTokens to collateral service providers. This can happen off-chain or on-chain.
5. Transfer of Loan Receivables
NPL buyers offer the purchased ABTokens to lenders and receive actual loan receivables from them.
6. Notification of Transfer of Loan Receivables, and Registration of an Additional Entry
Lenders notify borrowers of transfer of loan receivables and register an additional entry. After this, NPL buyers proceed with auctioning of the transferred collateral.
During the liquidation process for real assets, a part of the sales is passed on to NPL buyers and collateral service providers. Various interests exist, and the details may vary depending on the laws of the region in which the real assets are located. Details may vary depending on the contract with a collateral service provider.
In the case of crypto asset-backed loans, unlike real asset-backed loans, there is no maturity. However, in the following circumstances, if LTV falls below the Loss Cut Ratio, the cryptoassets deposited as collateral may be liquidated by participants who maintain the stability of the Money Pool.
- When prices of cryptoassets deposited as collateral fall
- When accumulated loan interest exceeds the value of cryptoassets deposited as collateral
- When prices of loaned cryptoassets rise and LTV remains below Loss Cut Ratio.
Liquidation participants check the status of borrowers through loans, interest, loan interest, value of collateral, and Loss Cut Ratio.
The liquidation process for cryptoassets is as follows:
1. Checking the Borrowing Status
Participants in cryptoasset liquidation evaluate borrowings, accumulated loan interest, and the value of collateral deposited by borrowers, and determine whether or not the collateral should be liquidated.
2. Debt Repayment
Liquidation participants repay part of the borrowing principal so that the status of borrowings is less than LTV. At this time, collateral of cryptoassets deposited by borrowers is transferred to the Money Pool.
3. Receipt of Liquidation Rewards
Liquidation participants receive rewards from the Money Pool for their participation in liquidation.
Participants in liquidation of crypto asset-backed loans can check the status of borrowers and liquidate loans by executing the Money Pool algorithm. Anyone can participate in the liquidation process.