Discrete Time-Based Liquidation
Discrete Time-Based Liquidation (“DTBL”) mechanism is effective for both peer-to-peer and peer-to-pool NFT lending protocols. It not only solves the problem of cascading liquidation risk, but also greatly improves the user experience (UX) for borrowers.
DTBL is applicable for both peer-to-pool and peer-to-peer platforms where the borrower can choose to extend the loan for an additional fixed term (e.g. one month) within the current fixed term or repay it fully to claim their NFT. DTBL is based on over-collateralization, and we believe that the possibility of continuously experiencing severe NFT floor price drops during a given fixed term period is extremely low. For example, taking BAYC’s floor price as an example, the probability of the floor price decreasing by 60% in a 30-day period is quite small. That is not to say that it can not happen, but the probability of it occurring is low, and the chance of it occurring continuously for a sustained period is even lower.
DTBL is quite straight forward. As long as the borrower extends or repays the loan on time, they will maintain control of their pledged NFT collateral.
Alice decides to try an NFT lending platform for an instant loan. This platform employs a discrete time-based liquidation mechanism. So what does this mean exactly?
She selects one of her whitelisted NFTs and decides to stake it on the protocol as collateral for an instant loan. The smart contract calculates some key data for her loan: how much she can borrow (Borrow Limit), what fixed interest rate she must pay for the use of the funds (Borrow APR), and how long she has to repay or extend the loan (Collection Term). Alice decides to borrow 50 ETH and after accepting and confirming the loan terms, she will immediately see the 50 ETH in her wallet and can now use the funds as she wishes.
Before the loan expires, she can extend the loan and the smart contract will recalculate the borrow limit and borrow APR. If the new borrow limit is lower than the current loan balance, she’ll have to top up her loan plus interest to ensure the security of the lending system and keep her loan in good health. If the new borrow limit is higher than the current loan balance, she can borrow more crypto if needed.
In addition, she can repay her loan at any time, and when the loan is fully repaid, her pledged NFT will be immediately transferred back to her crypto wallet.
If for any reason, Alice doesn’t repay the loan by the due date, she will have a 2-day Grace Period in which she can extend or repay the loan along with a required late penalty fee. However, if she fails to take action, the NFT will be in default and will no longer belong to her.