Unbound V2 is designed to be a novel decentralized lending platform that will allow users to borrow interest-free stablecoin loans against interest-bearing crypto assets as collateral. The Unbound V2 smart contract generates UND, a USD-pegged stablecoin, against user-supplied collateral assets, typically liquidity provider tokens (LPTs) and wrapped positions of Uniswap V3 like Concentrated Liquidity Market Makers (CLMM).
In the last article, we introduced the community to Unbound V2 highlighting its new features and improvements over the existing protocol. Now let us take a deep dive into how borrowing works on Unbound V2.
Borrowing at Unbound V2 is Vault based. Each collateral type is associated with a unique vault. A user can borrow UND by depositing collateral into one or more Unbound Vaults. For example, a user may borrow UND by depositing Sushiswap’s WETH-DAI LP tokens as collateral in the corresponding vault. Additionally, the user can supply collateral to the USDC-USDT vault to generate more UND. The borrowing parameters may differ across vaults and are dynamically changing. Initially, these parameters will be set by the protocol but can be later changed by the holders of the UNB platform governance token, through voting upon the launch of the Unbound DAO.
Over-collateralized UND loans
Unbound V2 requires borrowers to deposit collateral higher than the value of their borrowed UND. The excess collateral will ensure that the circulating supply of UND is always over-collateralized and serve as a buffer against market volatility. At each borrowing instance, Unbound’s factory smart contracts calculate the Collateralization Ratio (CR), which determines the percentage of the collateral backing the loan and is given by the formula:
Where C -Amount of collateral deposited in USD
L- Amount of UND borrowed
For example, for a loan of 250 UND drawn against $500 worth of collateral, the CR calculates to 200%.
The maximum amount of UND borrowed against a set amount of collateral depends upon the Minimum Collateral Ratio (MCR) of each Unbound vault. Users can borrow UND while maintaining a CR up to but not less than the MCR of the corresponding vault i.e CR>=MCR. For instance, for an Unbound Vault with an MCR of 110%, users can borrow UND such that the CR is greater than or equal to 110%.
It is important to note that loan positions with a Collateralization Ratio less than the Minimum Collateral Ratio will be eligible for liquidation. For this reason, users must maintain a healthy CR to prevent their positions from getting liquidated.
Unbound V2, like V1, charges no interest on UND loans. However, the protocol does charge a one-time borrowing fee each time a user borrows UND from the platform. The borrowing fee gets added to the outstanding user debt and must be paid at the time of loan repayment to unlock the underlying collateral.
Consider the example where a user borrows 200 UND by collateralizing LP tokens worth $500. Assuming the borrowing fee rate to be 0.5%, a borrowing fee of 1 UND (0.5% *500) will be charged by the protocol to the user. Thus, to unlock the entire collateral, the user must repay 201 (200+1) UND.
The borrowing fee rate is set to be variable. The rate can range from 0.5% to 5%, depending on the base rate and the amount of UND borrowed, and is calculated using the formula:
Borrowing fee = (baseRate + 0.5%)* UNDdebt
Where the base rate is a variable that increments with each redemption and decays with the time passed since the last fee event (last redemption or last issuance of UND). At the system launch, the base rate will be initialised to 0%.
For this article, we will not go into the details of redemption but you can refer to our whitepaper here for more information.
You can use the Unbound V2 testnet here to get a better understanding of borrowing and other platform functionalities. Refer to our step-by-step guides below for a smooth Testnet experience.
Unbound V2 Guides:
How to Create a Smart Account, Borrow and Repay UND: https://unboundfinance.medium.com/how-to-create-a-smart-account-borrow-and-repay-und-on-the-unbound-v2-testnet-514287c91371
How to Deposit and Withdraw Collateral: https://unboundfinance.medium.com/how-to-deposit-and-withdraw-collateral-on-the-unbound-v2-testnet-c845ddb80699?postPublishedType=initial
How to Liquidate Account(s) and Redeem UND: https://unboundfinance.medium.com/how-to-liquidate-account-s-and-redeem-und-on-the-unbound-v2-testnet-6b428b4c793f
About Unbound Finance
Unbound Finance is a novel, non-custodial lending platform, driven towards enabling newer and better opportunities of yield with a view to improving the overall capital efficiency of the DeFi ecosystem. The platform enables DeFi users to borrow over-collateralized synthetic asset loans in the form of UND stablecoin by collateralizing liquidity pool tokens (LP tokens) and concentrated liquidity positions of next-gen AMMs such as Uniswap v3.
Through synthetic assets like UND stablecoin, Unbound aims to unlock the liquidity available in DeFi DEXs and to enable the easy flow of this liquidity from one chain to another without actually removing it.
Key protocol highlights:
- Interest-free borrowing: Unbound does not charge any interest on the borrowed UND.
- Perpetual borrowing: At Unbound, borrowers have unlimited maturities. Users can unlock the underlying collateral at any time by simply paying off the outstanding debt.
- Stablecoin UND: UND is the first flagship product of the Unbound protocol. It is a decentralized, cross-chain stablecoin designed to be native to the AMM space.
- Factory Smart Contracts: Unbound makes use of liquidity lock contracts that are permissionless and support EVM-based AMMs like Uniswap, Balancer, Curve, SushiSwap and the like.
- Collateralizing concentrated liquidity positions: Unbound is one of the first protocols that allows concentrated liquidity positions to be used as collateral for borrowing synthetic crypto assets such as UND stablecoin.