Use Cases

This page gives a detailed overview of services and capabilities that will be available to crypto users within the Equilibrium parachain.

Liquidity and Deposits

Before any use cases are actually made available to Equilibrium users, there has to be some liquidity inside the parachain. There are two ways to get liquidity inside Equilibrium:

  • Users who have EQ tokens vested may claim these tokens and use them as collateral or bailout liquidity. There's no borrowing or lending of EQ tokens for now.

  • Users who want to be borrowers/lenders/bailsmen in the Equilibrium ecosystem can bring other crypto assets into our parachain via different Polkadot bridges.

Bridges

Bridges are secure communication protocols between two different blockchains (Bitcoin, Ethereum, EOS, Cosmos, Tezos, and many more are all compatible with Polkadot and Equilibrium. While serving as a standalone substrate, Equilibrium integrates ChainBridge as a means for communicating with the Ethereum blockchain. Thanks to Chainbridge modules, users will be able to deposit ETH and ERC-20 assets into Equilibrium, as well as bridge EQ tokens from Equilibrium into the Ethereum blockchain.

When Equilibrium becomes the Polkadot parachain (~Q1 2021), Polkadot itself should have a cross-chain messaging protocol and unified assets implemented by that time. There are also several projects building bridging solutions that should have low trust bridges ready for a broader public. These include bridges to the BTC, ETH, and Cosmos blockchains. Equilibrium follows these developments closely and will integrate all the available bridges and assets.

The typical bridging process may look something like this:

  • A user locks his assets in the smart contract on the source blockchain. He specifies a destination blockchain and address where he wants to receive a wrapped representation of his assets.

  • Relayers (third parties who run bridging software in a decentralized fashion) process the corresponding user transaction and reach consensus on minting assets to a user's address in the destination blockchain.

Unwrapping and receiving assets on the native blockchain works same way, but in opposite directions.

From the user perspective, it's a matter of sending ETH (for example) to the designated Ethereum address, then waiting a period of time for inclusion and finality confirmation, given different the specifics of different blockchains.

Now that you know how liquidity gets into Equilibrium, let's talk about use cases Equilibrium offers for liquidity holders.

Borrowing

You may borrow assets in Equilibrium in a collateralized fashion. There are no per-asset debt "positions," and Equilibrium treats your assets and liabilities as a complete portfolio. If the value of your assets exceeds the value of your liabilities, you're safe as a borrower and are not subject to liquidation. Liquidation is a simple balance purge where all of your assets and liabilities are transferred to bailsmen pool. The interest you pay depends on your portfolio risk and the portfolio collateralization levels we talked about in the Interest Rate Model section. Interest is payable in EQ tokens, and when you don't have a sufficient EQ token balance, the system will automatically sell your collateral to pay interest fees, so make sure you always have enough EQ liquidity to avoid unnecessary exchanging.

Lending

You may lend assets in Equilibrium and earn interest for doing so. The beauty of lending assets via Equilibrium comes from the fact that lenders transfer the liquidation risk to the bailsmen. When borrowers default, lenders get their assets back from the bailsman pool, while bailsman get liquidated collateral in return.

An example

Consider the following BTC borrow + liquidation example (1 BTC = 20 ETH for simplicity's sake).

1. Initial state

We have two bailsmen, two borrowers, and one lender in our simple example. The Lendable column shows the total number of tokens in the system available for lending.

Asset

Bailsman1

Bailsman2

Borrower1

Borrower2

Lender

Lendable

BTC

5

0

0

0

10

10

ETH

0

100

100

0

0

0

2. Borrower1 borrows 5 BTC (transfers 5 BTC to Borrower2) from Lender

Asset

Bailsman1

Bailsman2

Borrower1

Borrower2

Lender

Lendable

BTC

5

0

-5

5

5

10

ETH

0

100

100

0

0

0

3. Borrower defaults

Since we have set 1 BTC = 20 ETH, bailsmen have equal value of liquidity and thus split Borrower1's debt and collateral evenly:

Asset

Bailsman1

Bailsman2

Borrower1

Borrower2

Lender

Lendable

BTC

2.5

-2.5

0

5

10

10

ETH

50

150

0

0

0

0

Notice that following invariant applies within Equilibrium: Bailsman_collateral + Total_Debt + Borrower_collateral + Lendable = CONST

Lending rate

The interest that borrowers pay gets redistriuted among bailsmen and lenders. The following rules apply:

  • Under normal market conditions and sufficient bailsman liquidity, lenders receive 25% of the total interest payable for any given borrowed asset.

  • The lending rate adjusts based on the relative liquidity of the bailsman pool compared to the total amount borrowed. (The details are still being developed.)

Bailing out

Bailsmen provide liquidity in advance to cover for borrower liquidations. When borrowers default on their loans, their collateral and debt get distributed among bailsmen on a pro-rata basis. The only way bailsmen are able to get negative balances (liabilities) is through borrower liquidation. Furthermore, no bailsman can stop being a bailsman unless he covers all of the liabilities he has been entitled too. Baislmen are the keepers of the system. They make sure it stays solvent all the time, and receive interest rewards for bearing liquidation risks. 80% of the interest rate that the system collects from borrowers goes to the bailsmen. The other 20% accumulates inside treasury and is used as a third line of defense in case the bailsmen themselves become undercapitalized.

Margin trading

Our interoperable DeFi platform allows for leveraged trades on margin up to 100%.

Support of different assets

Equilibrium has the capability to go beyond the limits of current Ethereum-based decentralized exchanges. There is opportunity to add tokens from the Polkadot ecosystem (as well as from other blockchains) to the exchange. In doing so, the traded pairs on Equilibrium's DEX will not be limited to ERC-20 tokens (as it would be elsewhere), but can land on any blockchain that can be connected to the Polkadot ecosystem.

High leverage

Equilibrium’s approach to modeling collateralized loans allows for competitively low levels of collateralization of user portfolios. This means that high leverage is achievable, we're looking at 20x or even higher.

Limitations of DEXes

Bulding an on-chain decentralized exchange where all orders interact directly with each other on-chain achieves extensive decentralization, but leads to horrible user experience. All the transactions are expensive and slow, as users pay fees and wait for transactions to mine. Paying for placing, cancelling and modifying an order is plain terrible approach to building DeFi for people and should be avoided at all costs. Off-chain order books, where market-makers broadcast orders to be filled on-chain, partially solve the problems of the on-chain orderbooks (as outlined above), but have several issues of their own:

  • Front-running: MMs, validators/off-chain workers get to see orders before they get mined.

  • Trade failures: for example, an order is visible in the order book while pending settlement at the same time (the transaction is being mined).

  • Cancellation: Users need to pay transaction fees to cancel an order, updating an order becomes expensive. Furthermore, there's no support for complex order types.

Scalability of substrate and Polkadot technology let Equilibrium overcome these issues. There’s no mining involved, and consensus is reached much faster in Polkadot compared to Ethereum, for example.

Furthermore, designated off-chain workers and unsigned transactions make traders’ lives easier, as they potentially allow for the separation of trade matching and settlement. This would let them place numerous orders without paying transaction fees. Trades are dispatched to blockchain in batches, not one by one, further improving the scalability and the speed of the DEX.