Decentralised borrowing protocols and Money Markets offer competitive low interest loans to maximise capital efficiency by allowing reverse generation up to two-thirds of the value of the collateral.
A CDP works like a loan - users put up collateral in the form of ETH to generate stablecoins. Instead of selling Ether to have liquid funds, you can use the protocol to lock up your Ether, borrow against the collateral to withdraw stablecoins, and then repay your loan at a future date.
By freeing a maximum 33% of the dollar value deposited, not only are we able to face a 60% drawdown without a liquidation event but also earn an extra 3.3% APR on a stable deposit earning 10% APR.
$\text{Collateral Ratio} = 303\% \\ \text{Max. Loan-to-Value (mLTV)} = 90\% \\ \text{Loan-to-Value (LTV)} = 33\% \\ \text{Price drop to Liquidation} = 1-\frac{1}{\frac{\text{mLTV}}{\text{LTV}}} = 63.3\%$
As a CDP owner, avoiding liquidation is the number one priority. To avoid liquidations, picking a collateral ratio/liquidation price is essential.
The price of ETH is volatile, which means the collateral ratio can rise and fall quickly. Having a large enough safety net is of the upmost importance. We intent to maintain a collateral ratio (CR) that is comfortably above minimum CR with a maximum Loan-to-Value (LTV) of 33% which translates to over 300% CR. The gained capital efficiency is safe enough to keep peace of mind and earn few extra valuable percentage points of dry powder capital.