How do Loans work?

Abstract

The Bank of Cronos Loans Protocol is a decentralized, permissionless, and non-custodial protocol built on the Cronos blockchain that provides interest-free, collateral-backed loans. Borrowers can obtain loans by locking up CRO (WCRO CRC-20 token) as collateral and minting a stablecoin pegged to the US Dollar called Cronos USD (CUSD). The protocol is designed to provide optimal capital efficiency, minimal liquidation risks, and strong incentives for community participation.

1. Introduction

The current DeFi lending landscape is dominated by platforms that charge borrowers variable interest rates based on supply and demand. Borrowers face the risk of fluctuating interest rates, and in some cases, liquidations due to insufficient collateralization.

BOC Loans aims to address these issues by providing a system where users can obtain interest-free loans using CRO as collateral while maintaining a minimum collateralization ratio.

2. System Overview

The BOC Loans Protocol comprises several key components:

2.1. Collateralized Debt Positions (Loan) Borrowers lock up WCRO as collateral in Loans to mint CUSD. Each Loan must maintain a minimum collateralization ratio to ensure the stability of the system.

2.2. Cronos USD (CUSD) CUSD is a stablecoin pegged to the US Dollar, generated when borrowers open or adjust their Loans. Users can redeem CUSD for WCRO at the current CRO/USD price.

2.3. Stability Pool Users can deposit CUSD into the Stability Pool to earn a share of liquidation gains. The Stability Pool serves as a buffer to absorb liquidated debt and helps maintain system stability.

2.5. Price Oracle The protocol relies on an external price oracle (https://tectonic.gitbook.io/docs/developer/price-oracle) to obtain the current CRO/USD price, which is crucial for maintaining the system's collateralization ratios and triggering liquidations when necessary.

3. Key Mechanism

3.1. Opening and Adjusting Loans Borrowers can open Loans by depositing WCRO as collateral and minting CUSD. They can also adjust their Loans by adding or removing collateral, repaying debt, or withdrawing CUSD.

3.2. Redemption Mechanism Users can redeem CUSD for WCRO at the current CRO/USD price, which creates demand for CUSD and helps maintain its peg.

3.3. Liquidation Mechanism Undercollateralized Loans are liquidated to ensure the stability of the system. Liquidations are handled by the Stability Pool and incentivized through liquidation gains from collateral surplus.

3.4. Incentives and Rewards Users can earn liquidation rewards by depositing CUSD into the Stability. The protocol also rewards users for maintaining a healthy collateralization ratio.

4. Conclusion

The BOC Loans Protocol uses a novel approach to decentralized borrowing, offering interest-free loans backed by CRO collateral while maintaining system stability through effective liquidation and incentive mechanisms. By aligning incentives across borrowers and Stability Pool depositors, the BOC Loans Protocol aims to create a robust and efficient ecosystem for decentralized finance.