Borrowing
What is a Collateral Debt Position (CDP)?
A CDP is the unit of accounting used to track a specific borrowed debt amount, the respective collateral that backs it as well as the ratio between the value of these two assets, known as the Individual Collateral Ratio (ICR). Each CDP is tied to and owned by a single Ethereum account.
CDP owners have the freedom to make adjustments to their CDPs at any time by increasing their collateral, withdrawing some collateral, borrowing more debt, or repaying a part or the full outstanding debt. Any modification to the CDP triggers a corresponding adjustment to the ICR.
How can I borrow eBTC?
eBTC can be borrowed by opening a CDP and depositing a certain amount of collateral (stETH) to it. The borrower can then choose an amount of debt (eBTC) to take on the CDP while preserving an Individual Collateral Ratio (ICR) higher than the Minimum Collateral Ratio (MCR) of 110%. CDPs must have a size of at least 2 stETH of collateral at the moment of their creation.
For as long as a CDP has a ICR higher than the MCR, the owner may increase their debt and borrow more eBTC.
Once eBTC is borrowed, the collateral is stored in the protocol's Smart Contract system and eBTC is minted and transferred to the borrower for its usage.
Can I create multiple CDPs from the same account?
Yes, the system allows for multiple CDPs to be created from the same account. This is especially handy for users wishing to borrow eBTC with different Collateral Ratios or "risk" profiles for their different strategies.
What is the Collateral?
The collateral is an asset that a borrower pledges as security for a loan. In the case of eBTC, the system accepts Lido's stETH as the only collateral.
Lido is a decentralized staking protocol that allows users to stake their Ether without having to run their own validator node. Users can deposit their Ether into Lido's smart contract, which then pools the funds with other users' funds to stake them on Ethereum to contribute to its security. In return, users receive stETH tokens, in proportion to their deposit, which they can trade or utilize in DeFi Protocols such as eBTC.
stETH is a yield-bearing, rebasing token. This means that every day, Ethereum staking yield is distributed to all stETH holders by increasing each user's balance proportionally without changing their total underlying shares. Hence, with every rebase, a share of stETH becomes more valuable. and the stETH token increases in value with respect to ETH according to its projected APY. As a result, this leads to the collateral backing eBTC's loans appreciating and slightly improving the ICR in the process. Using a yield-bearing collateral virtually enables loans that become safer with each passing day (without considering the stETH/BTC price fluctuations).
What is the gas stipend?
In order to open a CDP, the system requires the user to transfer 0.2 stETH (gas stipend) in addition to the collateral. This amount is separate from the collateral and is not included in the Individual Collateral Ratio (ICR) calculation. When a borrower repays their debt, the system returns the full gas stipend along with the collateral.
However, if the CDP is liquidated, the gas stipend is transferred to the liquidator as an incentive to cover the transaction's gas cost.
The Gas Stipend will continue to accrue staking rewards and no part of its yield will be subject to the Protocol Yield Share. Therefore, this stETH amount will have accrued the same yield as if held upon full debt repayment.
Are there any fees related to borrowing?
Borrowing eBTC is done without any upfront fees nor interest on the principal nor debt. Instead, the protocol earns revenue for its sustainability by taking a percentage from the collateral staked ETH yield. This percentage is called Protocol Yield Share (PYS). Initially, the PYS will be set to 50% of the yield and it will be adjusted as needed through the minimized governance system.
As previously described in the Collateral section, stETH's yield is realized through a daily rebase process, which increases the balance for each user. The PYS is subsequently applied by allocating this percentage of stETH underlying shares from the total balance increase in the system during each rebase.
What is a collateral ratio?
The ratio between the value of a given collateral and the debt associated with it (CR = Collateral Value / Debt Value).
Individual Collateral Ratio (ICR)
The ratio between the value of the collateral and the debt of a specific CDP (ICR = CDP’s Collateral Value / CDP’s Debt Value).
For example:
Let's say the current oracle price is 14 stETH/BTC, and you decide to borrow 1 eBTC using 20 stETH as collateral (excluding the Gas Stipend), then the ICR for your CDP will be:
Let's now say that you now want to increase the collateral amount of your CDP by 20 stETH in order to reduce your risk of liquidation. The new ICR can be estimated as follows:
Finally, imagine that you wish to borrow 1 additional eBTC from your existing CDP. The system will only allow you to do so if the resulting ICR is higher than the MCR. Let's see if this would be the case:
Increasing the debt to a total of 2 eBTC returns the CDP's ICR to 143% in this case, which is well above the MCR of 110%. Note that price fluctuations will also impact the ICR.
Total Collateral Ratio (TCR)
The ratio between the value of the total collateral of the system and the total debt emitted by it (TCR = System’s Total Collateral Value / System’s Total Debt Value).
For example:
Let's say the current oracle price is 12 stETH/BTC, and the system has lended a total of 120 eBTC collateralized by a total of 3000 stETH, then the system's TCR would be:
This parameter is the best indicator of the overall's systems solvency.
Minimum Collateral Ratio (MCR)
The lowest CR that a CDP must maintain in order to avoid triggering a liquidation under Normal Mode. This is defined at 110% which means that, in order to avoid getting liquidated, a CDP must maintain a collateral value higher than its corresponding debt by at least 10%.
For example:
Let's say the current oracle price is 10 stETH/BTC and you want to borrow 1 eBTC, your CDP will need to have at least 11 stETH as collateral (plus the gas stipend) in order to avoid getting liquidated during Normal Mode:
A low collateral ratio is enabled due to the high price correlation between stETH and BTC. See the Risk Analysis Report for more details.
Critical Collateral Ratio (CCR)
The collateral ratio that, if the TCR reaches, triggers Recovery Mode. The CCR is defined at 125%, therefore, it is highly recommended to borrowers to maintain their CDP's ICR above this mark.
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