Borrowing
Borrowing
Why would I use Elliptic for borrowing?
Elliptic protocol offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan). Instead of selling ckBTC to have liquid funds, you can use the protocol to lock up your ckBTC, borrow against the collateral to withdraw TAL, and then repay your loan at a future date.
For example: Borrowers speculating on future ckBTC price increases can use the protocol to leverage their ckBTC positions up to 11 times, increasing their exposure to price changes. This is possible because TAL can be borrowed against ckBTC, and sold on the open market to purchase more ckBTC — rinse and repeat.
Note: This is not a recommendation for how to use Elliptic. Leverage can be risky and should be used only by those with experience.
What is a collateral?
Collateral is any asset that a borrower must provide to take out a loan, acting as a security for the debt. Currently, Elliptic only supports ckBTC as collateral.
Is ckBTC the only collateral accepted by Elliptic?
Yes, ckBTC is the only collateral type accepted by Elliptic.
How can the protocol offer interest-free borrowing?
The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the last redemption time. For example: If more redemptions are happening (which means TAL is likely trading at less than 1 USD), the borrowing fee would continue to increase, discouraging borrowing. Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, Elliptic instead opts for a fully decentralized and direct feedback mechanism via one-off fees.
How can I borrow with Elliptic?
To borrow you must open a Vault and deposit a certain amount of collateral (ckBTC) to it. Then you can draw TAL up to a collateral ratio of 110%. A minimum debt of 2,000 TAL is required.
What is a Vault?
Do I have to pay fees as a borrower?
Every time you draw TAL from your Vault, a one-off borrowing fee is charged on the drawn amount and added to your debt. Please note that the borrowing fee is variable (and determined algorithmically) and has a minimum value of 0.5% under normal operation. The fee is 0% during Recovery Mode. A 200 TAL Liquidation Reserve charge will be applied as well but returned to you upon repayment of debt. Another consideration is the price of TAL at the time of repayment. If at the time you want to repay your loan, TAL is trading at $1.02 on the market and you need to buy it, you are incurring a 2% 'fee'. You can avoid this by having your borrowed funds readily available or by being able to wait for TAL to return to peg.
How is the borrowing fee calculated?
The borrowing fee is added to the debt of the Vault and is given by a baseRate. The fee rate is confined to a range between 0.5% and 5% and is multiplied by the amount of liquidity drawn by the borrower. For example: The borrowing fee stands at 0.5% and the borrower wants to receive 4,000 TAL in their wallet. Being charged a borrowing fee of 20.00 TAL, the borrower will incur a debt of 4,220 TAL after the Liquidation Reserve and issuance fee are added.
When do I need to pay my loan back?
Loans issued by the protocol do not have a repayment schedule. You can leave your Vault open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.
What is the collateral ratio?
This is the ratio between the Dollar value of the collateral in your Vault and its debt in TAL. The collateral ratio of your Vault will fluctuate over time as the price of Bitcoin changes. You can influence the ratio by adjusting your Vault’s collateral and/or debt — i.e. adding more ckBTC collateral or paying off some of your debt.
What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?
The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode). This is a protocol parameter that is set to 110%. So if your Vault has a debt of 10,000 TAL, you would need at least $11,000 worth of ckBTC posted as collateral to avoid being liquidated. To avoid liquidation during Recovery Mode, it is recommended to keep the ratio comfortably above 150% (e.g. 200% or better 250%).
What happens if my Vault is liquidated?
You lose your collateral as your debt is paid off through liquidation, i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% * 10 / 110) of your collateral’s Dollar value.
What happens if my Vault is redeemed against?
When TAL is redeemed, the ckBTC provided to the redeemer is allocated from the Vault(s) with the lowest collateral ratio (even if it is above 110%). If at the time of redemption, you have the Vault with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly. The USD value by which your ckBTC collateral is reduced corresponds to the nominal TAL amount by which your Vault’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected Vaults, making them less risky. Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off a Vault’s debt are called full redemptions. In such a case, your Vault is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time. Let’s say you own a Vault with 2 ckBTC collateralized and a debt of 3,200 TAL. The current price of ckBTC is $2,000. This puts your collateral ratio (CR) at 125% (= 100% * (2 * 2,000) / 3,200). Let’s imagine this is the lowest CR in the Elliptic system and look at two examples of a partial redemption and a full redemption:
Example of a partial redemption:
Somebody redeems 1,200 TAL for 0.6 ckBTC and thus repays 1,200 TAL of your debt, reducing it from 3,200 TAL to 2,000 TAL. In return, 0.6 ckBTC, worth $1,200, is transferred from your Vault to the redeemer. Your collateral goes down from 2 to 1.4 ckBTC, while your collateral ratio goes up from 125% to 140% (= 100% * (1.4 * 2,000) / 2,000). Example of a full redemptionSomebody redeems 6,000 TAL for 3 ckBTC. Given that the redeemed amount is larger than your debt minus 200 TAL (set aside as a Liquidation Reserve), your debt of 3,200 TAL is entirely cleared and your collateral gets reduced by $3,000 of ckBTC, leaving you with a collateral of 0.5 ckBTC (= 2 - 3,000 / 2,000).
How can you offer a collateral ratio as low as 110%?
By making liquidation instantaneous and more efficient, Elliptic needs less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.
How can I take advantage of leverage?
You can sell the borrowed TAL on the market for ckBTC and use the latter to top up the collateral of your Vault. That allows you to draw and sell more TAL, and by repeating the process you can reach the desired leverage ratio.Assuming perfect price stability (1 TAL = $1), the maximum achievable leverage ratio is 11x.
Why did the collateral and debt of my Vault increase without my intervention?
If Vaults are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.
Please note that although the system is diligently tested, a hack or a bug that results in losses for the users can never be fully excluded.
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