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Lending

Lenders deposit USDT into the system in return for A- or B-Tranche tokens. Given that these tranche tokens trade at a discount, the lender can expect to earn fixed-rate interest on their deposited capital. There are two ways that lenders can acquire A/B Tranche tokens:

Buy Bonds

Lenders purchase A/B Tranche tokens from the AMM pool at the current price (spot market). They are guaranteed to get tranche tokens, but must accept the current market discount rate.

Example:

  • A-Tranche tokens are currently trading at $0.80
  • Lender buys 1250 A-Tranche tokens with $1000
  • The bond matures, and pays out A-Tranches in full
  • The lender can then redeem their 1250 A-Tranche tokens for $1250 worth of collateral
  • The lender earned $250 on their $1000 (25% return)

Bid Orders

Bidders can set a limit order on the market, specifying the discount that they are willing to pay for A/B Tranche tokens. It is possible that the market never fills these orders (i.e. borrowers are not willing to pay the lender's specified discount). The benefit is that the lender gets to specify the discount they are willing to pay in order to match their risk assessment of the underlying collateral.
Note: This technique only works on systems that allow for limit orders. This includes concentrated liquidity AMMs like UniswapV3, and order-book exchanges like 0x.

Example:

  • A-Tranche tokens are currently trading at $0.80
  • Lender sets a limit order to buy 2000 A-Tranche tokens for $1000 (i.e. price of $0.50)
  • Borrow pressure brings the price of the tranche tokens all the way down to $0.49, filling the lender's order
  • The bond matures, and pays out A-Tranches in full
  • The lender can then redeem their 2000 A-Tranche tokens for $2000 worth of collateral
  • The lender earned $1000 on their $1000 (100% return)