• Wed. Dec 6th, 2023

This solution can reduce liquidation and over-collateralization risks

This solution can reduce liquidation and over-collateralization risks

Crypto lending is one of the most important use cases in decentralized finance (DeFi). The three largest DeFi lending protocols – Aave, JustLend and Compound – collectively hold $12 billion in locked value (TVL), or 23% of total TVL in DeFi.

Despite its popularity, DeFi lending platforms have not solved the most pressing problems, which are excessive collateralization, high liquidation risk, and real asset ownership.

Crypto lending 101

With DeFi, lenders gain access to diverse yield opportunities and passive income streams. Borrowers, on the other hand, are exposed to more risk because they have to pledge collateral worth a higher value than the amount borrowed. This is because DeFi lending is decentralized and non-custodial, meaning there are no traditional assessments like credit scores or income certificates to determine a secured loan amount. Therefore, DeFi loans are highly leveraged. For example, borrowers can get 50% or 75% of the amount they put as collateral.

Despite over-collateralization, the risk of liquidation is high due to the volatility of crypto-assets. For example, if the value of the assets used as collateral falls below a certain threshold, the protocol automatically liquidates them.

While crypto lending remains an important part of the DeFi ecosystem, the market needs better models to help borrowers feel secure about their collateral.

This DeFi lending protocol minimizes liquidation risks

Some DeFi protocols attempt to address the common challenges of lending platforms, and the Layer-1 chain protocol suggests another approach that favors both lenders and borrowers.

The Knowles protocol is built on the Cosmos SDK. It addresses some of the key inefficiencies of crypto and defy money markets, including over-collateralized lending, high risk of liquidations, and lack of real asset ownership. The protocol offers a non-custodial, cross-chain solution and aims to become a one-stop shop for all users’ crypto transactions.

Nolus’ key feature is DeFi Lease, which connects lenders and borrowers through an intuitive interface.

Knowles’ DeFi Lease addresses some key issues in the DeFi lending landscape. Initially, it offers financing of up to 150% of the initial investment, which means borrowers can acquire three times more than their current equity. They can also retain actual ownership of leveraged assets allowing them to earn income over the asset in their amplified DeFi lease position.

How does DeFi lease work?

Borrowers secure a down payment (in any asset) and receive 150% of it as a loan in fixed coins, both of which are used to purchase the desired digital asset. These funds are held in the DeFi lease position as collateral, mitigating margin call risk. Knowles’ smart contracts manage these transactions on-chain for ease and transparency of traders.

If the loan and interest are fully repaid, the collateral will be returned. Nolus’s DeFi Lease operates at a fixed interest rate and has no hidden costs, providing traders with transparent lending rates. After recent updates, users can use their asset appreciation to repay the loan.

Source: Knowles

Contrary to intuition, the elimination of over-collateralization by the Knowles Protocol does not raise liquidation risk. Instead, it employs strategies to prevent it, such as encouraging users to maintain a good loan-to-value (LTV) ratio as a buffer against price swings. Thanks to the platform’s innovative approach to acting as collateral for down payment and loan purchasing, users have increased protection of their position. With real-time LTV updates, borrowers can revise collateral levels as needed. When asset prices fall significantly, users are advised to add collateral or opt for partial liquidation, which protects part of their position, minimizes potential losses and ensures continued access to Knowles’ services.

Designed for lenders and borrowers alike

The Knowles protocol offers lenders the freedom to adjust dynamically calculated, cash-based interest and stakes. Launched in Osmosis, the native token, NLS, enables functions such as transaction fees, governance and liquidity provision. Active participation in network consensus and protocol governance will reward stakeholders. In addition, the Knowles protocol offers better rates to fund providers and lower interest rates to shareholders leveraging assets through DeFi leases.

Source: Knowles

Knowles already addresses some of the biggest challenges in DeFi lending, but has worked to add more relevant features such as:

  • Market Close – The ability to close lease positions at current market prices using outstanding debt from the leased asset.

  • Limit Liquidation – “Limit” orders that provide the ability to determine the price that is executed open or close.

  • Client-Side Swap – Ability to swap any crypto asset directly on Nolus instead of going to a DEX to transact directly.

  • Support of multiple decentralized exchanges.

The Knowles protocol represents a promising solution to the key issues hindering DeFi loan adoption. With proactive strategies to mitigate over-collateralization and liquidation risks, Nolus is paving the way for a safer and more user-friendly DeFi lending environment.

Learn more about Knowles

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