Borrowing
Why would I use the DeFi Franc protocol for borrowing?
The DeFi Franc protocol offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan). Instead of selling ETH or BTC to have liquid funds, you can use the protocol to lock up your ETH or wBTC, borrow against the collateral to withdraw DCHF, and then repay your loan at a future date.
For example: Borrowers speculating on future ETH or wBTC price increases can use the protocol to leverage their ETH or wBTC positions up to 11 times, increasing their exposure to price changes. This is possible because DCHF can be borrowed against ETH or wBTC, sold on the open market to purchase more ETH or wBTC - rinse and repeat.*
*Note: This is not a recommendation for how to use the DeFi Franc protocol. Leverage can be risky and should be used only by those with experience.
What do you mean by collateral?
Collateral is any asset which a borrower must provide to take out a loan, acting as a security for the debt.
What can I deposit as collateral?
With the first version of the DeFi Franc protocol, you can use ETH or wBTC as collateral. In the upcoming versions you will also be able to use LP-Tokens as a form of collateral.
How can the protocol offer interest-free borrowing?
The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the last redemption time. For example: If more redemptions are happening (which means DCHF is likely trading at less than 1 CHF), the borrowing fee would continue to increase, discouraging borrowing.
Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, the DeFi Franc protocol instead opts for a fully decentralized and direct feedback mechanism via one-off fees.
How can I borrow?
To borrow, you must open a Position and deposit a certain amount of collateral (ETH or wBTC) to it. Then you can draw DCHF up to a collateral ratio of 110%. A minimum debt of 2,000 DCHF is required.
What is a borrowing Position?
A Position describes the issuance of a loan. Each Position is linked to an Ethereum address and each address can have just one Position.
Positions maintain two balances: one is an asset (ETH or wBTC) acting as collateral and the other is a debt denominated in DCHF. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Position’s collateral ratio changes accordingly.
You can close your Position at any time by fully paying off your debt.
Do I have to pay fees as a borrower?
Every time you draw DCHF from your Position, a one-off borrowing fee is charged on the drawn amount and added to your debt. Please note that the borrowing fee is variable (and determined algorithmically) and has a minimum value of 0.5% under normal operation. The fee is 0% during Recovery Mode.
A 200 DCHF Liquidation Reserve charge will be applied as well, but returned to you upon repayment of debt.
Another consideration is the price of DCHF at the time of repayment. If at the time you want to repay your loan DCHF is trading at CHF 1.02 on the market and you need to buy it, you are incurring a 2% 'fee'. You can avoid this by having your borrowed funds readily available or by being able to wait for DCHF to return to peg.
How is the borrowing fee calculated?
The borrowing fee is added to the debt of the Position and is given by a baseRate. The fee rate is confined to a range between 0.5% and 5% and is multiplied by the amount of liquidity drawn by the borrower.
For example: The borrowing fee stands at 0.5% and the borrower wants to receive 4,000 DCHF to their wallet. Being charged a borrowing fee of 20.00 DCHF, the borrower will incur a debt of4,220 DCHF after the Liquidation Reserve and issuance fee are added.
When do I need to pay my loan back?
Loans issued by the protocol do not have a repayment schedule. You can leave your Position open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.
What is the collateral ratio?
This is the ratio between the CHF value of the collateral in your Position and its debt in DCHF. The collateral ratio of your Position will fluctuate over time as the price of ETH or wBTC changes. You can influence the ratio by adjusting your Position’s collateral and/or debt — i.e. adding more collateral or paying off some of your debt.
For example: Let’s say the current price of ETH is CHF 3,000 and you decide to deposit 10 ETH. If you borrow 10,000 DCHF, then the collateral ratio for your Position would be 300%.
If you instead took out 25,000 DCHF that would put your ratio at 120%.
What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?
The minimum collateral ratio (short MCR) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode). This is a protocol parameter that is set to 110%. So if your Position has a debt 10,000 DCHF, you would need at least CHF 11,000 worth of ETH or wBTC posted as collateral to avoid being liquidated.
To avoid liquidation during Recovery Mode, it is recommended to keep ratio comfortably above 150% (e.g. 200% or better 250%).
What happens if my Position is liquidated?
You lose your collateral as your debt is paid off through liquidation, i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% * 10 / 110) of your collateral’s Swiss Franc value.
What is the Liquidation Reserve?
When you open a Position and draw a loan, 200 DCHF is set aside as a way to compensate gas costs for the transaction sender in the event your Position being liquidated. The Liquidation Reserve is fully refundable if your Position is not liquidated, and is given back to you when you close your Position by repaying your debt. The Liquidation Reserve counts as debt and is taken into account for the calculation of a Position's collateral ratio, slightly increasing the actual collateral requirements.
What happens if my Position is redeemed against?
When DCHF is redeemed, the ETH or wBTC provided to the redeemer is allocated from the Position(s) with the lowest collateral ratio (even if it is above 110%). If at the time of redemption you have the Position with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.
The CHF value by which your ETH or wBTC collateral is reduced corresponds to the nominal DCHF amount by which your Position’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected Position, making them less risky.
Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off a Position’s debt are called full redemptions. In such a case, your Position is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.
Let’s say you own a Position with 2 ETH collateralized and a debt of 3,200 DCHF. The current price of ETH is CHF 2,000. This puts your collateral ratio (CR) at 125% (= 100% * (2 * 2,000) / 3,200). Let’s imagine this is the lowest CR in the DeFi Franc system and look at two examples of a partial redemption and a full redemption:
Example of a partial redemption
Somebody redeems 1,200 DCHF for 0.6 ETH and thus repays 1,200 DCHF of your debt, reducing it from 3,200 DCHF to 2,000 DCHF. In return, 0.6 ETH, worth CHF 1,200, is transferred from your Position to the redeemer. Your collateral goes down from 2 to 1.4 ETH, while your collateral ratio goes up from 125% to 140% (= 100% * (1.4 * 2,000) / 2,000).
Example of a full redemption
Somebody redeems 6,000 DCHF for 3 ETH. Given that the redeemed amount is larger than your debt minus 200 DCHF (set aside as a Liquidation Reserve), your debt of 3,200 DCHF is entirely cleared and your collateral gets reduced by CHF 3,000 of ETH, leaving you with a collateral of0.5 ETH (= 2 - 3,000 / 2,000).
How can you offer a collateral ratio as low as 110%?
By making liquidation instantaneous and more efficient, the DeFi Franc Protocol needs less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.
How can I take advantage of leverage?
You can sell the borrowed DCHF on the market for ETH or wBTC and use the latter to top up the collateral of your Position. That allows you to draw and sell more DCHF, and by repeating the process you can reach the desired leverage ratio.
Assuming perfect price stability (1 DCHF = 1 CHF), the maximum achievable leverage ratio is 11x. It is given by the formula:
Why did the collateral and debt of my Position increase without my intervention?
If Positions are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.
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