Cryptoasset-Backed Loans
Cryptoasset-backed loans refer to loans that are taken out by borrowing cryptocurrencies using crypto assets held by users as collateral.
Loan Purpose
The act of lending other assets using cryptoassets as collateral usually takes place for the following reasons:
Utilization of newly purchased cryptoassets
Certain cryptoassets may be required for economic activities. If the transaction party does not own the assets, it is possible to borrow the necessary cryptoassets from the Money Pool using cryptocurrencies owned by the transaction party as collateral.
Minimization of opportunity cost for cryptoasset monetization
When in need of cash, funds can be raised by selling cryptoassets that are in one’s possession. However, if an increase in the value of the assets to be sold is expected, the act of selling the assets will be a huge opportunity cost. In order to minimize such opportunity cost, it is possible to borrow and cash out stable cryptocurrencies by entrusting the cryptoassets in possession as collateral.
Possibility of asset value increase
If an increase in the value of assets in possession is expected that exceeds the value of the new assets to be purchased, their holdings can be increased through loans. When the value of existing assets increases, it becomes possible to repeat the method of buying new assets by entrusting the existing assets as collateral.
Scenario 1. Loan
The owner of cryptoassets entrusts the assets in possession as collateral and borrows cryptocurrencies equivalent to the collateral. The cryptoassets deposited in the Money Pool are locked up. Since there is no maturity of cryptoasset-backed loans, the loaned cryptocurrencies can be paid off anytime. When the borrower repays the principal of the loaned cryptocurrencies and the interest accrued, the locked assets are unlocked and the assets can be reclaimed immediately.
The detailed process for taking out a loan is as follows:
Depositing Cryptoassets in Possession
The cryptoasset owner deposits part of his assets in the Money Pool as collateral.
LToken Issuance
LToken equivalent to the value of the collateral is issued and transferred to the crypto asset owner's wallet.
Borrowing Different Types of Cryptoassets
The owner of the cryptoassets borrows cryptocurrencies as needed.
DToken Issuance and LToken Lockup
At the same time the loan is taken out, DTokens are issued for the amount corresponding to the loan. The tokens store information regarding the loan amount and interest to be paid, and this is the basis for the total repayment amount. In addition, the LToken equivalent to the loan amount is locked up.
Scenario 2. Redemption
Repayment of Principal and Interest
The loan and accrued interest are paid out to the Money Pool with the same assets as the crypto assets that were borrowed.
DToken Burn and LToken Lockup
Upon redemption, the crypto asset owner's DTokens are burned. The collateral of crypto assets deposited in the Money Pool is unlocked, i.e., the collateral equivalent to the DTokens burned. Also, locked LTokens are unlocked.
Cryptoasset Transfer and LToken Burn
The crypto assets with reclaimed collateral are transferred to the borrower, and the LTokens held by the borrower are destroyed.
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