【Borrower】Simplex Protocol: A New Era of Borrowing in DeFi

In a previous article, we talked about an idea of a no-liquidation lending protocol: https://scapital.medium.com/insightful-examination-of-the-no-liquidation-lending-protocol-f6923835988f

Here, we followed the idea and discuss what it means to a borrower.

Introduction

We introduce a significant innovation with Simplex Protocol for the DeFi lending domain: preset fiat liquidation line. This novel approach, a departure from traditional percentage-based collateral ratio liquidation models, offers much more predictability and security in DeFi lending. By enabling borrowers to set a fixed fiat liquidation threshold, the Simplex Protocol streamlines risk management, making DeFi borrowing more accessible and stable for a wider borrowers base.

Existing Borrower’s Challenges in Traditional DeFi Lending

• Unpredictable Borrowing Rates: Platforms like AAVE and Compound have variable interest rates, creating uncertainty for borrowers. This dynamic environment complicates loan planning and management due to unpredictable market changes that affect repayment schedules.
• Market-Induced Liquidations: Protocols such as Aave and MakerDAO have models where collateral value drops can trigger sudden liquidations, particularly during market downturns. This situation increases the risk of collateral loss for borrowers, often resulting in asset liquidation below optimal value. The ever-present risk of liquidation under these models adds stress and uncertainty, impacting the borrower experience.
• Limited Collateral Options: Many DeFi platforms have a limited scope of accepted collaterals, often confined to major cryptocurrencies and specific ERC-20 tokens. This limitation narrows the borrowing viability for those with diverse asset portfolios and raises inclusivity issues within DeFi.

Traditional DeFi vs. Fixed Fiat Line

A critical aspect where the Simplex Protocol differs from traditional DeFi lending platforms lies in its approach to liquidation. Understanding this difference is key to appreciating the innovative nature of the Simplex Protocol:

Fixed Preset Fiat-Based Liquidation Line (Simplex Protocol):

• Predictability and Stability: Borrowers set a fiat-based(such as USD) liquidation price, offering clarity and shielding them from crypto market volatility. This threshold remains constant, irrespective of percentage fluctuations in the crypto asset’s value.

Percentage-Based Fluctuating Crypto Asset Collateral Line (Existing DeFi Platforms):

• Market Volatility and Uncertainty: Liquidation is triggered based on crypto asset value percentage changes. This model is highly susceptible to market volatility, leading to unpredictability and increased risk for borrowers.

This comparison underscores the borrower-centric approach of Simplex Protocol, prioritizing predictability and stability in an otherwise fluctuating market environment.

Borrow with Simplex Protocol: Emma’s Example

Assume Emma, an ETH holder, chooses Simplex Protocol for its clear terms and borrower-friendly features. This is how it will work as a walk-through instance:

• Deposit and Collateral Conversion

1. Depositing ETH: Emma deposits 10 ETH into Simplex Protocol. Given the current market rate, $2,000/ETH, her collateral is valued at $20,000.
2. Conversion to Staked ETH: The protocol automatically converts her ETH into staked ETH (stETH).

• Loan Terms and Management

1. Setting a Liquidation Price: Emma sets a liquidation price at $1,000, a FIAT PRICE under the ceiling of current market price, per ETH.
2. Borrowing Fee: ONLY a one-time fixed fee is charged, making her costs clear.

• During the Loan Term

1. Flexibility: Emma has the option to repay her loan early, maintaining control over her collateral commitment.
2. Market Monitoring: She watches the ETH market price, ensuring it stays above her liquidation threshold.

• End-of-Term Options

1. Repayment: Early repayment allows Emma to reclaim her stETH collateral.
2. Market Downfall: If ETH falls to her liquidation price, the protocol liquidates the full amount of her collateral to cover the loan.
3. Loan Maturity: OR If she doesn’t repay by the end, the collateral is liquidated to settle the loan.

Loan-to-value Ratio Advantage: Simplex vs. AAVE(or anyone else)

Now let’s see how does Simplex’s innovative preset liquidation mechanism improve with different scenarios:

• Situation: Emma owns 10 ETH, each initially valued at $2,000, giving her a total collateral value of $20,000.
• Loan Amount: She opts to borrow $10,000 against her ETH collateral in both Simplex Protocol and AAVE(or anyone else).

If with Simplex Protocol:

• Initial LTV Ratio: 50% ($10,000 loan against her $20,000 ETH collateral).
• Liquidation Line: She sets a fiat-based liquidation line at $1,000 per ETH.
• Market Change: The market drops, and ETH’s price falls to $1,250 per ETH. Emma’s collateral is secure as the price remains above her liquidation line.

If with AAVE(or anyone else):

• Initial LTV Ratio: 50% (chooses a $10,000 loan against her $20,000 ETH collateral), but protocol mandates a dynamic 80% LTV maximum.
• Market Change: ETH’s price decrease to $1,250 per ETH reduces her collateral value to $12,500. This situation brings her LTV ratio to 80%, precariously close to the maximum limit. Any further drop in ETH value could trigger imminent liquidation, putting Emma’s collateral at significant risk.

Comparative Table

In these illustrative scenarios, while Simplex Protocol offers Emma a much more secure buffer against market volatility, AAVE places her in a very precarious position where any further decline in ETH value could lead to immediate liquidation. This comparison highlights the enhanced security and control provided by Simplex Protocol’s innovative liquidation approach.

Summary: A Protocol Tailored for Borrowers

Simplex Protocol aims to be a liquidation-minimized lending protocol to improve lending efficiency with key features other than merely borrower-preset collateral liquidation price. Here is a detailed comparison:

This table showcases Simplex’s total unique features in the DeFi lending market, highlighting its advantages for borrowers.

Conclusion

The introduction of the preset fiat-based liquidation line by the Simplex Protocol represents a significant stride forward in DeFi lending, particularly in enhancing the capital efficiency of crypto collateral. This innovative mechanism offers borrowers not only a safeguard against the volatility inherent in crypto markets but also optimizes the use of their crypto assets.

By setting a fixed fiat liquidation threshold, borrowers can more effectively leverage their crypto holdings, minimizing unnecessary liquidations and maximizing capital utilization. This approach, central to Simplex Protocol, greatly enhances predictability and security in the borrowing process. As the protocol evolves, it continues to push the boundaries of how crypto collateral is managed in DeFi lending, making it a more practical and borrower-centric platform in an ever-evolving financial landscape.

SCapital, a visionary crypto-native fund, is championing novel strategies in the DeFi landscape. Beyond mere investment, we actively partake in governance and advisory roles, ensuring continuous value growth.