Borrower trade (fCash)
Last updated
Last updated
Let us explore how a borrow trade work on @notionalfinance
Borrowing DAI with ETH Collateral: A Comprehensive Example ⬇️
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📈 Let's explore a scenario where a user wants to borrow DAI using their $2000 worth of ETH as collateral, with an LTV ratio of 0.5 (50%).
In this case, the user should receive nearly $1000 worth of DAI in return for their borrowing trade. Let's dive in! 💰
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BTW
If you make the above trade right now, you would earn 2.27% APY after deducting the interest.
Here is the calc:
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Back to the system-level explanation
For the system, the selected pool(1-year fDAI, 6-month fDAI, and 3-month fDAI) is essential for determining proportions and exchange rates.
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Here is what the system-level computation looks like
Proportion (P) = fCash / (DAI + fCash)
Exchange rate = ((1 / Scalar) * (ln(P / (1-P)))) + ((Anchor * time)+1) + (liquidityFee * time)
Interest rate = (Exchange rate - 1) / time
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Basically, it computes the interest rate based on the utilization of the selected liquidity pool.
To execute the borrowing trade, the user must provide collateral and mint fDAI pair (+ve fDAI and -ve fDAI). A swap between +ve fDAI and cDAI takes place.
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🔎 Now, let's focus on the exchange rate of fDAI.
The fDAI value for DAI is calculated to determine the quantity of fDAI to be minted.
For example, if 1043 1-Year fDAI, 1021.5 6-Month fDAI, and 1010.75 3-Month fDAI are worth 1000 DAI (Collateral value * LTV).
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After swapping +fDAI for DAI, the user receives almost $1000.
It's important to note that the user's portfolio will include -fDAI (equivalent to the initially minted amount) and cDAI worth 1000 DAI (999.8 DAI in this case).
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🔄 Proportion (P_n) = new fCash balance / (old DAI balance + old fCash balance)
Exchange rate = ((1 / Scalar) * (ln(P_n / (1-P_n)))) + ((Anchor * time)+1) + (liquidityFee * time) DAI received = fDAI minted / Exchange rate
Interest rate = (Exchange rate - 1) / Time
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🔍 This trade affects the pool and rates, reshaping them for future transactions.
It's important to consider the dynamic nature of the liquidity pool and its impact on borrowing conditions.
Stay informed and make the most of your assets!
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💼 Whether you're an investor or a borrower, understanding the intricacies of DeFi platforms like Notional is crucial.
Stay knowledgeable, explore opportunities, and make informed decisions.
Here is a better context to understand the reason behind the swap:
