Orchai Money Market

Orchai Money Market is an Anchor-inspired lending protocol that enables depositing and borrowing of stablecoins. Lenders have the ability to deposit their stablecoins to earn interest, and borrowers can provide their sAssets as collateral to borrow stablecoins.

Orchai’s main objectives are security, capital efficiency, and user experience. Hence, instead of being able to borrow any asset from a pooled set of assets, Orchai users will only be able to borrow one stablecoin, which is USDT. This is also known as a single borrowable asset.

Whenever users supply collateral to borrow, it will remain their property. The collateral can not be withdrawn by other users (except during liquidation). This mechanism of Orchai is to keep users safe from the risk of depositing their assets in a pool containing one “dangerous asset." If users deposit in a pool model and one of the assets crashes, the value of the pool can fall under the value of the debt borrowed against the pool, which makes the protocol now have bad debt.

However, with this mechanism, users will not receive interest on collateral anymore. In contrast, you can borrow more with less risk of liquidation or lower liquidation penalties while spending fewer gas fees. Moreover, since the collaterals in Orchai are sAssets, borrowers can still receive the staking rewards as additional interest. In the beginning, the Orchai Money Market will allow borrowers to collateralize sORAI and scORAI to borrow USDT. Moreover, in the future more tokens will be supported, such as sATOM, sOSMO, etc.

Lending Mechanism

Borrowing from the Orchai Money Market is as straightforward as locking up collateral in exchange for a loan. The main parameter of a debt position is its borrowing capacity: the maximum amount of debt an account can accrue. An account’s borrowing capacity is determined by the amount and quality of locked-up collateral. Orchai defines a loan-to-value ratio (LTV) for each type of collateral, which indicates the fraction of a collateral asset’s value that contributes to a debt position’s borrowing capacity. LTV ratios range from 0 to 1 and are a function of an asset’s volatility and liquidity. Stable, liquid assets will have high LTV ratios, while volatile illiquid assets will have low LTV ratios. Orchai Money Market sums the value of all collateral assets multiplied by their LTV ratios to determine an account’s total borrowing capacity.

𝑏𝑜𝑟𝑟𝑜𝑤𝐿𝑖𝑚𝑖𝑡=(𝑎𝑚𝑜𝑢𝑛𝑡𝐿𝑜𝑐𝑘𝑒𝑑×𝑠𝐴𝑠𝑠𝑒𝑡𝑃𝑟𝑖𝑐𝑒×𝐿𝑇𝑉)𝑏𝑜𝑟𝑟𝑜𝑤𝐿𝑖𝑚𝑖𝑡 =∑︁ (𝑎𝑚𝑜𝑢𝑛𝑡 𝐿𝑜𝑐𝑘𝑒𝑑 × 𝑠𝐴𝑠𝑠𝑒𝑡𝑃𝑟𝑖𝑐𝑒 × 𝐿𝑇𝑉)

Orchai uses an algorithmic interest rate algorithm to determine lender and borrower rates based on borrowing demand and supply.

Utilization rate at time t is the ratio of the total amount borrowed to the total amount deposited, that is:

u(t)=totalBorrowed(t)totalDeposited(t)u(t) =\frac{totalBorrowed(t)}{totalDeposited(t)}

Based on the utilization rate, the algorithm calculates the availability of capital within the pool.

The interest rate model manages liquidity risk in the protocol through user incentives to support liquidity:

  • When capital is available: set low-interest rates to encourage borrowing.

  • When capital is scarce: set high-interest rates to encourage repayments of debt and additional supplying

This algorithm can be formulated generally as follows:

𝑏𝑜𝑟𝑟𝑜𝑤𝑅𝑎𝑡𝑒(𝑡)=𝑓(𝑢(𝑡))𝑏𝑜𝑟𝑟𝑜𝑤𝑅𝑎𝑡𝑒(𝑡) = 𝑓(𝑢(𝑡))
𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑅𝑎𝑡𝑒(𝑡)=𝑢(𝑡)×𝑏𝑜𝑟𝑟𝑜𝑤𝑅𝑎𝑡𝑒(𝑡)𝑑𝑒𝑝𝑜𝑠𝑖𝑡 𝑅𝑎𝑡𝑒(𝑡) = 𝑢(𝑡) × 𝑏𝑜𝑟𝑟𝑜𝑤𝑅𝑎𝑡𝑒(𝑡)

Where 𝑓 is an increasing function and has a value between 0 and 1.

Liquidation Mechanism

Orchai protocol implements a liquidation mechanism to protect all funds from under-collateralization. As far as all debts are sufficiently collateralized, the protocol remains in good status.

The liquidation contract ensures that all lenders are safe by incentivizing liquidators who observe and liquidate loans with a borrowing amount above the allowed borrowing limit. These incentives are called “liquidation discount”. Unlike other lending protocols, with a fixed liquidation discount, our liquidation mechanism is Auction Liquidation, in which participants bid against each other by putting money in pools known as liquidation pools. Each pool has a different liquidation discount. Pools with lower discounts are given a higher execution priority, thus being executed first during liquidation events.

This way provides higher robustness and solvency guarantees compared to a traditional “keeper” system with a fixed liquidation discount. Keeper systems rely on arbitrageurs to finance liquidations on a discretionary basis, which can result in a liquidity crunch at times of high market volatility. On the contrary, pooled liquidation is fully collateralized and enforces a lengthy withdrawal period. Liquidation demand is, therefore, predictable and stable in the face of temporary shocks.

However, before being liquidated, money in the liquidation pool is not used for anything, leading to unprofitable. To optimize liquidity and attract liquidators, part of the money in the liquidation pool is deposited back into the protocol to earn lending yield. This yield is being divided equally among all participants in the pool. So liquidators not only earn liquidation discounts when liquidating but also earn lending yield when waiting for a chance to liquidate.

Last updated