Lendle’s core use cases
In the ever-evolving landscape of decentralized finance, innovation continues to reshape the way we perceive and interact with traditional financial services. At the forefront of this transformative wave lies Lendle, a cornerstone protocol that underpins the thriving DeFi ecosystem within Mantle Network.
With this article, we embark on the first of numerous literary journeys aimed at unravelling the intricacies of Lendle, exploring its fundamental principles, and delving into both basic and advanced use cases that showcase its true potential.
As we set out to explore the depths of Lendle, it’s crucial to lay a strong foundation by understanding the significance of lending markets, which play a pivotal role in creating a dynamic financial environment.
This inaugural article serves as a stepping stone, elucidating why Lendle, as a lending market, is not just a cog in the DeFi wheel but rather its very fuel, driving innovation and growth.
Lendle’s protocol
Lending comes in a variety of forms, both in the cryptocurrency space and in more traditional financial avenues. Lendle has adopted a proven approach known as overcollateralization, a concept pioneered by Aave.
In the realm of overcollateralized lending, users can provide assets as collateral and borrow funds against those assets. However, it’s important to note that the borrowed amount is intentionally capped at a value lower than the total worth of the collateral assets. This practice is why it’s referred to as overcollateralization: users are required to offer a greater value of assets than the amount they are borrowing. This strategy provides an added layer of security for lenders and helps mitigate potential risks in the lending process.
How much a user can borrow is calculated according to the Loan To Value (LTV) parameters of each of the assets supplied. The LTV is a fraction between 0 and 1 and is typically determined by the volatility and available liquidity on chain.
Using the LTV the total amount that can be borrowed is then calculated by adding up all the individual assets’ borrowing power:
Overcollateralized lending is a favourable and safe way to build lending infrastructure in DeFi because the borrower has more collateral on the platform than the amount that can be taken out of reach.
In order to protect suppliers from losing funds, Lendle’s protocol is designed in such a way that the funds provided as collateral can be confiscated from borrowers when certain thresholds are met, that would endanger the likelihood of a borrower not repaying the loan.
The parameter used to calculate this threshold in Lendle is called the liquidation threshold.
A user can be liquidated, meaning that someone else can step in to pay back the loan on the user’s behalf and in turn confiscate the equivalent in funds from the supplied collateral plus a bonus, when the user’s Health Factor (HF) drops below 1.
The Health Factor is calculated as follows:
Lendle’s overcollateralized lending thereby enables suppliers to safely lend their assets for a supply APY and borrowers to borrow funds against their collateral assets.
Having explored Lendle’s fundamental mechanics, let’s detail the use cases tailored for both suppliers and borrowers.
Suppliers’ use cases
The use case for suppliers on Lendle is quite straightforward: they can generate yield in a safe manner on their assets by lending them out to borrowers and receiving interest in return.
This yield is further boosted by $LEND incentives on Lendle.
Furthermore, the yield is boosted by flash loans. Flash loans are short term loans that can be borrowed without collateral, but the loan principle in addition to a fixed fee of 0.09% must be repaid in the same block. This additional yield compounds in the supply side vaults and thereby increases yield for suppliers.
Borrowers’ use cases
The use cases for borrowers are more audience specific.
Being able to borrow less than you supply might sound capital inefficient, but actually quite the opposite is true!
Lots of entities in DeFi hold certain coins as part of their strategy and are not looking to sell those assets. By putting up those assets as collateral on Lendle, loans can be taken out in other currencies and used elsewhere to increase capital efficiency.
Borrowers can also use Lendle to effectively go short on an asset by borrowing an asset and then selling that asset on the market.
Alice could for example supply $100 USDT as collateral, borrow $50 WETH and sell that WETH for $50 USDT. Alice now holds $150 USDT and a loan of $50.
If the price of Ethereum now drops by 20%, she still holds $150 USDT, but the loan only equates to $40 in WETH. Alice can then buy $40 WETH from the market and repay the loan, making her new position $110 USDT with no remaining loan.
The USDT acquired by selling the $50 WETH can also be (re-) supplied on Lendle, increasing Alice’s total collateral on Lendle. In doing so she could start leveraging, but this topic will be explained in the next article of this series!
Another use case for borrowers is the possibility to use assets elsewhere in DeFi without having to buy those assets (and thereby selling your collateral assets). An example here could be providing liquidity on a DEX with borrowed funds or (temporarily) borrowing an asset that needs to be used or locked for a certain amount of time such as Binance Launchpads.
Looking ahead
In this inaugural article, we’ve delved into the intricacies of Lendle’s lending contracts, shedding light on their operational mechanisms. Moreover, we’ve underscored the pivotal role of overcollateralized lending as a fundamental component within DeFi ecosystems.
In the future, subsequent instalments in this series will embark on more profound analyses and explorations of the depths of DeFi, unraveling intricate use cases and multifaceted utilities that Lendle brings to the fore. Stay tuned for an in-depth journey into the realm of advanced possibilities and practical applications.
