Lending
Decentralized lending using V$ (Vow Dollars) enables borrowers to access digital currency loans without intermediaries.
Decentralized Lending of V$
Decentralized lending of V$ (Vow Dollars) enables borrowers to accessdigital currency loans without intermediaries, leveraging blockchain technology for transparency, automation, and trustless transactions. Borrowers use VOW tokens as collateral to secure their loans, ensuring that lenders have recourse to them, even in cases of default.
How Decentralized Lending of V$ Works
Loan Origination:
Borrowers request a loan in V$, specifying the amount needed.
To collateralise the loan, borrowers deposit VOW tokens as collateral, valued at (or above) the loan amount (in USD equivalent terms), as well as to cover the interest of 18% up front.
For example, if a borrower borrows v$1820 then v$180 is held in the pool and the borrower receives v$820 instantly.
Loan Terms:
Loans are issued with the following conditions:
Repayment Period: 372 days, divided into 12 periods of 31 days.
Interest Rate: Each 31-day period incurs a cost to the borrower of 1.5%, compounding over the term if unpaid.
Repayment Options:
Borrower repays the loan in V$ :
In full before the 372-day term ends.
The borrower will repay v$820 if they keep the funds for a full year.
If they repay in only 6 months they will only be required to repay v$820 minus 1.5% x 6 (because they already advance paid the interest at the start)
Scenario 1: Loan is Repaid
The borrower repays the V$ loan amount and accrued interest within the 372-day term.
Upon repayment:
The full VOW collateral is released back to the borrower.
The lender earns the interest (1% per 31-day period), which is added to their initial loan value in v$ from the pool.
The pool has an extra 6% v$ in it which is collected by the VOW Locker.
Scenario 2: Borrower Defaults
If the borrower fails to repay the loan by the end of 372 days, the loan will keep running.
18% of the initial loan value is instantly claimed by the lender (12% and the VOW locker pool 6%) from the collateral for another 372 day period.
If the remaining collateral is still worth more than 50% of the loan value there is no change. The loan keeps running until repaid.
If the collateral value falls below 50% of the original loan value the lender has the right to force liquidate the position and claim all remaining VOW collateral.
If the VOW collateral value is higher than the USD value of the original loan, the loan keeps running until the v$ are re-paid.
Advantages of Decentralized V$ Lending
Trustless and Transparent:
Smart contracts automate the process, ensuring fairness without requiring intermediaries.
Risk Mitigation for Lenders:
VOW collateral ensures lenders are protected from borrower defaults.
Flexible Terms for Borrowers:
Borrowers can repay at any time within the term, reducing interest obligations.
Digital Currency:
Loans are issued in V$, a digital currency which, although its secondary market value rises and falls, is able to be used to claim discounts in ecosystem businesses.
Potential Risks
Market Volatility:
The value of VOW tokens used as collateral may fluctuate, potentially complicating liquidation in cases of default.
The value of V$ tokens borrowed may fluctuate, potentially complicating repayments.
Impermanent Collateral Coverage:
If the VOW token's value drops below the loan amount, the lender may face insufficient collateral coverage.
Smart Contract Vulnerability:
The system relies on smart contracts, which, if exploited, could impact funds.
Example Scenario
Borrower A requests a loan of v$1,000.
Deposits 1,180 USD worth of VOW tokens as collateral which appreciates to 1,200 USD by maturity of the loan.
Agrees to the 372-day repayment term with 1.5% interest per 31-day period.
If Repaid:
Borrower pays back 1,000 V$ plus the prepaid interest (e.g., 18% total over 12 periods = 1,180 V$).
Lender collects 120 V$ in interest and the principal.
Vow Locker collects 6% yield.
If Defaulted:
If the borrower fails to repay the loan by the end of 372 days, the loan will keep running.
18% of the initial loan value is instantly claimed by the lender and VOW lock pool from the collateral for another 372 day period.
If the remaining collateral is still worth more than 50% of the loan value there is no change. The loan keeps running until repaid.
If the collateral value falls below 50% of the original loan value the lender has the right to force liquidate the position and claim all remaining VOW collateral.
If the VOW collateral value is higher than the USD value of the original loan, the loan keeps running until the v$ are re-paid.
Conclusion
The decentralized lending of V$ provides a secure, transparent, and efficient framework for borrowers and lenders. Borrowers gain access to v$ loans using their VOW as collateral, while lenders are incentivized by competitive interest rates and collateral recovery in default scenarios. This model showcases the power of decentralized finance to bridge traditional lending mechanisms with blockchain innovation.
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