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This page gives a detailed overview of services and capabilities that will be available to crypto users within the Equilibrium parachain.
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 allocations may use them as insurance liquidity or collateral. Lending of EQ tokens is prohibited at the moment.
- Users who want to be borrowers/lenders/insurers in the Equilibrium ecosystem can bring other crypto assets into our parachain via different Polkadot bridges and the XCM
Bridges are secure communication protocols between two different blockchains: Bitcoin, Ethereum, BSC, Cosmos, Solana, and many more are all compatible with Polkadot and Equilibrium. Equilibrium integrates ChainBridge as a means for communicating with the Ethereum and ETH-like blockchains. Thanks to Chainbridge modules, users will be able to deposit assets from Ethereum, BSC, HECO, Polygon networks to Equilibrium, as well as bridge EQ tokens from Equilibrium into all of these blockchain.
However, more trusted solution is ultimately needed. Unfortunately there is no native bridge solution in the ecosystem at the moment, so the option Equilibrium has on the table is to integrate with bridges supported by Moonbeam parachain. Moonbeam is an EVM chain which supports EVM to EVM bridging working with several well known bridges: Celer, Synapse, Axelar, Multichain, LayerZero.
The typical bridging process may look something very similar to the following:
- 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 direction.
From the user perspective, it's a matter of sending for example ETH 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.
You may borrow assets in Equilibrium in a collateralised 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 insurance pool as described in Margining section. 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 swaps.
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 insurers. When borrowers default, system transfers their debt to insurers, once insurers cover liquidated debt, lenders are able to redeem their liquidity back.
The protocol does not guarantee liquidity, instead it relies on the interest rate model to incentivise it. In periods of extreme demand for an asset, the liquidity of the protocol (the tokens available to withdraw or borrow) will decline; when this occur, interest rates rise, incentivising supply, and disincentivizing borrowing.
Consider the following BTC borrow + liquidation example (1 BTC = 20 ETH for simplicity's sake).
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.
Since we have set 1 BTC = 20 ETH, bailsmen have equal value of liquidity and thus split Borrower1's debt and collateral evenly:
Notice that following invariant holds inside Equilibrium:
- Total Collateral = Total Borrower Collateral + Total Bailsman Collateral + Total Master Account balance + Total Lendable
- Total Debt = Total Borrower Debt + Total Bailsman Debt
The difference between the above two aggregates is the amount of physical asset brought into the system. When user borrows X amount of an asset from the lending pool the following checks happen:
- X + Total Debt <= Total Lendable
- X + Total Debt <= Total Collateral - Total Debt
The interest that borrowers pay gets redistributed among bailsmen and lenders. The following breakdown applies:
So the minimum possible interest rate borrowers pay is 2.5% APR, while the biggest contributor to the final interest rate figure is the Primary Borrower Rate which depends on the leverage the borrower undertakes and the risk (volatility) of the borrower portfolio. 30% of the Primary Borrower Rate is funnelled to lenders, while 70% is funnelled to insurers (bailsmen).
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. Bailsmen receive 5% extra reward in a form of borrower collateral which borrowers pay as a penalty (see Margining section for details) Bailsmen are the keepers of the system. They make sure it stays solvent all the time, and receive interest rewards for bearing liquidation risks. 70% of the interest rate that the system collects from borrowers goes to the bailsmen. The other 30% is funnelled to Lenders.
Our interoperable DeFi platform allows for leveraged trades on margin up to 20% (5x leverage).
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.
Equilibrium’s approach to modeling collateralized loans allows for competitively low levels of collateralization of user portfolios. This means that high leverage is achievable.
Building an on-chain decentralized exchange where all orders interact directly with each other on-chain achieves extensive decentralisation, 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 order books (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 can potentially make traders’ lives easier, as they allow for the separation of trade matching and settlement. This would let users place numerous orders without paying transaction fees, allow for trades to be dispatched to blockchain in batches, further improving the scalability and the speed of the DEX.
Equilibrium currently runs fully on-chain order book DEX where users pay transaction fees for placing orders, cancelling orders and marking trades. Moving order book off-chain is something that needs to be thoroughly analysed in terms of implications and should involve governance discussion and decision.