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.
Collateral is any asset which a borrower must provide to take out a loan, acting as a security for the debt.
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.
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.
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 DCHFis required.
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.
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 DCHFLiquidation 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.
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
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 DCHFto their wallet. Being charged a borrowing fee of
20.00 DCHF, the borrower will incur a debt of
4,220 DCHFafter the Liquidation Reserve and issuance fee are added.
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
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 3,000and you decide to deposit
10 ETH. If you borrow
10,000 DCHF, then the collateral ratio for your Position would be
If you instead took out
25,000 DCHFthat would put your ratio at
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 11,000worth of ETH or wBTC posted as collateral to avoid being 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.
When you open a Position and draw a loan,
200 DCHFis 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.
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 ETHcollateralized 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
0.6 ETHand thus repays
1,200 DCHFof your debt, reducing it from
2,000 DCHF. In return,
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
140% (= 100% * (1.4 * 2,000) / 2,000).
Example of a full redemption
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 DCHFis entirely cleared and your collateral gets reduced by
CHF 3,000of ETH, leaving you with a collateral of
0.5 ETH (= 2 - 3,000 / 2,000).
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.
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:
maximum leverage ratio =
where MCR is the Minimum Collateral Ratio.
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.