Lending pools intro

This page describes core benefits for market makers when using Liquorice lending pools

Using Liquorice pools, market makers can quote any tokens they wish without the need to hold those tokens in their wallets in advance. The required tokens are borrowed from the pool and transferred to the order originator once the PMM’s quote wins the right to settle.

To use borrowing, the PMM only needs to provide collateral, which can be as low as 20% of the trade's notional value. Collateral can be provided either in advance or at the time of the trade by specifying the correct parameters in the quote.

From a technical standpoint, the process of using pools by PMMs is simple: they specify the parameters in the quote to express their desire to borrow specific tokens when settling trades.

Here's an example of the flow:

1. The PMM pre-deposits 700 USDC as collateral into the Liquorice pool.

2. The solver requests 1 wETH in exchange for 3000 USDC.

3. The PMM provides a quote stating that their price is 1 wETH, and they would like to borrow 1 wETH from the pool in case their quote wins the auction. The PMM also specifies that they would like to transfer 3000 USDC from the trader to the Liquorice pool as collateral. From the technical standpoint this is done by simply configuring a couple of parameters in the quote.

4. If the quote doesn’t win the auction, nothing further happens.

5. If the quote wins, the fact of borrowing 1 wETH will be recorded in the smart contract, and the trade will be settled.

6. The PMM will end up with 3700 USDC of locked collateral, which they can unlock by repaying the debt of 1 wETH. Until repaid, interest is paid on any outstanding debt.

In this case, the PMM was able to carry out a swap of $3,000 in trade notional, using only 700 USDC of their own capital and no wETH pre locked on his wallet.

The details on how to interact with Liquorice lending pools are described in the following pages.

Quick Overview of the Interest Rate Model

Liquorice implements different interest rate models for stablecoins and cryptocurrencies.

For Stablecoins:

• The minimum rate is fixed at 5%.

• The maximum rate is either 25% or the funding rates index, whichever is lower. The funding rates index averages around 11%.

• The actual rate is a function of two parameters: pool utilization and funding rate dynamics. The higher these parameters, the higher the rate.

The idea behind this model is to link the interest paid on stablecoins to the funding rate dynamics. Essentially, in most cases, the PMM pays a rate between 5% and the current average funding rates on centralized exchanges.

The actual interest rate model is as follows:

If Ut < Uoptimal:

Rt = R0*(Uoptimal - Ut)+R1*Ut

If Ut ≥ Uoptimal:

Rt = R1 + R2(Ut-Uoptimal)/(1-Uoptimal)

Where:

• R0 = minimum rate of 5%

• R1 = funding rate received through oracle, but not less than R0 and not more than 25%

• R2 = scale factor to discourage overutilization, set at 0% at launch

• Ut = utilization at time t

• Uoptimal = optimal utilization, set at 75% at launch

For Cryptocurrencies:

The model is very similar but R1 is a hardcoded paramter meaning that there is no linkage to funding rate dynamics. Other parameters such as minimal rate are set as per each individual cryptocurrency.