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Zero-Liquidation Loans: A Structured Product Approach to DeFi Lending

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  • Aetienne Sardon

Abstract

Zero-Liquidation loans allow DeFi users to borrow USDC against their ETH holdings, but without the risk of being liquidated in case of LTV shortfalls. This is achieved by giving users the option to repay their loans, either in USDC or through their previously pledged ETH (the concept can be generalized to other currency pairs as well). Liquidity providers, on the other hand side, are compensated with a higher yield for bearing the ETH downside risk. A positive side effect of zero-liquidation loans is that they are more robust against flash crashes and have a lower financial contagion effect than current lending and borrowing protocols.

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  • Aetienne Sardon, 2021. "Zero-Liquidation Loans: A Structured Product Approach to DeFi Lending," Papers 2110.13533, arXiv.org.
    • Handle: RePEc:arx:papers:2110.13533
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    File URL: http://arxiv.org/pdf/2110.13533
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    References listed on IDEAS

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    1. Kaihua Qin & Liyi Zhou & Pablo Gamito & Philipp Jovanovic & Arthur Gervais, 2021. "An Empirical Study of DeFi Liquidations: Incentives, Risks, and Instabilities," Papers 2106.06389, arXiv.org, revised Oct 2021.
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