Borrowing

Why would I use Palladium for borrowing?

The protocol offers interest-free loans and is more capital-efficient than other borrowing systems (i.e. less collateral is needed for the same loan).

Instead of selling BTC to have liquid funds, you can use the protocol to lock up your BTC, borrow against the collateral to withdraw PUSD, and then repay your loan at a future date.

What do you mean by collateral?

Collateral is any asset that a borrower must provide to take out a loan. BTC is the collateral used on Palladium.

This collateral ensures any loans issued in PUSD by the protocol are fully redeemable against the BTC used as the collateral. This ensures the protocol’s stability and solvency.

Is BTC the only collateral accepted?

Yes, BTC is the only collateral type accepted by the protocol.

How can the protocol offer interest-free borrowing?

The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the amount being redeemed and the last redemption time.

For example, if more redemptions are happening than usual (which means PUSD is likely trading at less than 1 USD), the borrowing fee would increase, discouraging borrowing.

Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, the protocol instead opts for a fully decentralized and direct feedback mechanism via one-off fees. This completely avoids third-party intervention and counter-party risk.

How can I borrow with Palladium?

To borrow you must open a Trove and deposit a certain amount of collateral (BTC) into it. You can then draw PUSD up to a collateral ratio of 130%.

The minimum amount that can be drawn is 500 PUSD.

What is a Trove?

A Trove is where you take out and maintain your loan. Each Trove is linked to a BTC wallet address and each address can have just one Trove. If you are familiar with Collateralized Debt Positions (CDPs) from other platforms, Troves are similar in concept.

Troves maintain two balances: one is an asset (BTC) acting as collateral, and the other is a debt denominated in PUSD. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Trove's collateral ratio changes accordingly.

You can close your Trove at any time by fully paying off your debt.

Do I have to pay fees as a borrower?

Every time you draw PUSD from your Trove, a one-off borrowing fee is charged on the drawn amount and added to your debt.

Note that the borrowing fee is variable and determined algorithmically, and has a minimum value of 0.5% under normal operation. The fee is 0% during Recovery Mode.

A 50 PUSD Liquidation Reserve will be applied as well but returned to you upon repayment of debt.

How is the borrowing fee calculated?

The borrowing fee is added to the debt of the Trove. The fee rate is confined to a range between 0.5% and 5% and is multiplied by the amount of liquidity drawn by the borrower.

For example: The borrowing fee stands at 0.5% and the borrower draws 4,000 PUSD from their open Trove. The borrower will obtain 3,781 PUSD after the Liquidation Reserve and issuance fee are deducted. The borrowing fee is calculated on the borrowed amount less the Liquidation Reserve.

When do I need to pay my loan back?

Loans issued by the protocol do not have a repayment schedule. You can leave your Trove open and repay your debt any time, as long as you maintain a collateral ratio of at least 130%.

What is the collateral ratio?

This is the ratio between the US Dollar value of the collateral in your Trove and its debt in PUSD.

The collateral ratio of your Trove will fluctuate over time as the price of BTC changes. You can influence the ratio by adjusting your Trove collateral and/or debt, i.e. adding more BTC collateral or paying off some of your debt.

For example: Let’s say the current price of BTC is $0.01 and you decide to deposit 3,000,000 BTC. If you borrow 10,000 PUSD, then the collateral ratio for your Trove would be 300%.

If you instead took out 25,000 USDL that would put your ratio at 120%.

What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?

The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode).

This is a protocol parameter that is set to 110%, so if your Trove has a debt of 10,000 PUSD, you would need at least $11,000 worth of BTC value deposited as collateral to avoid being liquidated.

To avoid liquidation during Recovery Mode, it is recommended to keep the ratio comfortably above 130% (e.g. 150% or, better yet, 200+%).

What happens if my Trove is liquidated?

You lose your collateral as your debt is paid off through liquidation via the Stability Pool (borrower redistribution in rare circumstances), i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 7.08% (= 100% * 10 / 130) of your collateral’s Dollar value.

What is the Liquidation Reserve?

When you open a Trove and draw a loan, 50 PUSD is set aside as a way to compensate gas costs for the transaction sender in the event your Trove is liquidated.

The Liquidation Reserve is fully refundable if your Trove is not liquidated, and is credited to you while you close your Trove by repaying your debt.

The Liquidation Reserve counts as debt and is taken into account for the calculation of a Troves collateral ratio, slightly increasing the actual collateral requirements.

Do I lose the 50 PUSD if my Trove is liquidated?

Yes, if your Trove is liquidated you will lose the 50 PUSD gas reserve. This is higher than gas fees on Palladium because the contract will run forever and gas fees may increase over time, as we’ve seen with Ethereum. This reserve is compensation to those spending the time executing the liquidation transactions.

What happens if my Trove is redeemed against?

When PUSD is redeemed, the BTC provided to the redeemer is allocated from the Troves with the lowest collateral ratio (even if it is above 130%). If, at the time of redemption, you have the Trove with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.

The PUSD value by which your BTC collateral is reduced corresponds to the nominal PUSD amount by which your Troves debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral.

As a positive side effect, redemptions improve the collateral ratio of the affected Troves, making them less risky.

Redemptions that do not reduce your debt to 0 are called ‘partial redemptions’, while redemptions that fully pay off a Trove's debt are called ‘full redemptions’. In such a case, your Trove is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.

How can you offer a collateral ratio as low as 130%?

By making liquidation instantaneous and more efficient, the protocol needs less collateral to provide the same guarantee level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.

Why did the collateral and debt of my Trove increase without my intervention?

If Troves are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.

Are there notifications to inform the user about collateralization levels before borrowing?

Yes. Information will be displayed on what the minimum collateralization level is, and how to effectively reduce the risk of liquidation.

The system also displays the Total Collateral Level at any point in time.

As long as your individual collateral level (ICR) remains above 130% your collateral is safe from liquidation, even during recovery mode.

How are Troves sorted and ordered?

Palladium relies on a particular data structure: a sorted, doubly-linked list of Troves that remains ordered by individual collateral ratio (ICR), i.e. the amount of collateral in USD value of BTC divided by the amount of debt in PUSD.