Under-collateralized Loans
Borrow up to 5 times your collateral.
What is undercollateralized loans?
In traditional Lending Protocols, such as AAVE and Compound, borrowers are limited in the amount of assets they can borrow relative to the amount of collateral they provide. This means that the amount of asset that can be borrowed is typically less than the value of the collateral deposited.
However, with the concept of undercollateralized loans, borrowers can borrow more than the value of the collateral deposited. This means that the ratio of the loan amount to the collateral value is greater than 1, and this allows the borrower to leverage their collateral to borrow a greater amount of money.
It's important to note that undercollateralized loans come with an increased level of risk for the lender since the value of the collateral may drop below the value of the loan, if the value of the collateral drops the lender will have to liquidate the collateral in order to recoup the loan value. As such, undercollateralized loans are typically used with a higher interest rate to compensate for the additional risk.
Why should I care about undercollateralized loans?
There are several reasons why one might be interested in undercollateralized loans. Firstly, undercollateralized loans allow borrowers to leverage their assets to gain access to greater amounts of funding than they would be able to through traditional overcollateralized loans. This can be useful for those looking to expand their business, invest in a new project, or even just cover unexpected expenses.
Additionally, undercollateralized loans can be beneficial for those who may not have enough assets to meet the requirements of overcollateralized loans. This means that undercollateralized loans can increase access to credit for a wider range of borrowers.
Furthermore, undercollateralized loans can also offer a greater return on investment for borrowers as they are able to leverage their assets to access larger loans at a lower cost. This can be especially beneficial for borrowers who are confident in their ability to repay the loan, as well as their ability to grow the value of their assets.
How do UnderCollateralized loans work?
The Mirai protocol allows users to gain access to loans of up to 5 times the value of their initial collateral deposit, but with a catch. In order to access these loans, users are required to follow pre-determined lending strategies set by the protocol. This means that the loan remains under the control of the protocol and can be recalled at any time.
When a user deposits collateral and borrows a loan worth 5 times the value of the collateral, the protocol continuously monitors the value of the lent assets. If at any point the value of these assets drops to a level where the "health score" falls below 1, the user may be subject to liquidation. This is a mechanism put in place to protect the protocol from potential losses and to ensure that borrowers maintain a sufficient level of collateral to cover the loan.
The total amount of assets that can be borrowed is given by the formula below:
Liquidation occurs according the formula given below.
This formula is applicable when the assets in a user's chosen strategy are worth less than the borrowed amount. If the assets have a higher value than the borrowed amount, the user is in a profit position and there is no risk of liquidation. In other words, the formula helps protect borrowers from potential liquidation if the value of their assets drops below the borrowed amount. However, if the assets have a higher value than the borrowed amount, the user is in a advantageous position and can continue to hold their assets without risk of liquidation.
Where can I use under collateralized loans?
Currently, there are two instances in which undercollateralized loans can be utilized:
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