Collateral Backed Lending

Every single lending is secured by a collateral

Over-collateralized lending is widely used in Web3 space because the cost of generating on-chain identity (in most of cases, blockchain address) is nearly zero. Collateral/Asset backed lending allows for ignoring identity credit and focus on the lending transaction itself. A lending is called over-collateralized when the collateral's market value is higher than the borrowed amount.

Therefore, every loan that takes place on the PumpX protocol is secured by collateral. The most important thing a lender should consider is the discount rate of collaterals they are willing to accept in the default case.

Collateral Ratio

The collateral ratio refers to the proportion of the loan amount divided by the floor price of the NFT Collection. When a loan occurs, the funds lent by the protocol's Lending Offers to the buyer will not exceed the maximum ratio set by the liquidity provider (LP).

For example, if the current floor price of an NFT collection is 20 ETH, and the maximum collateral ratio set by a lender is 50%, then the upper limit of the single loan amount that the lender can provide for a BNPL order is 10 ETH.

With the fluctuation of the NFT Collection floor price, the collateral ratio of a loan will change as well. That is, when the floor price rises, the collateral ratio decreases, and when the floor price falls, the collateral ratio increases. Before the end of the loan period, the protocol will not automatically execute liquidation when the collateral ratio changes.

This means that only when the buyer defaults on repayment, the collateral assets will be liquidated to the LP. Therefore, the LP needs to assess a reasonable price for the NFT Collection in mind, and use this to set the maximum loan ratio.

Loan Default and Liquidation

NFT assets are not divisible, but the default of NFT loans needs to be liquidated. Organizing auctions for collateral is inefficient and requires offering discounts to attract other bidders. This not only harms the interests of the lender, but also lowers the floor price of the NFT collection. In certain market conditions, the auction may not be completed.

Pumpx's peer-to-peer makes liquidation process clear and easy. It can ensure that in the event of default, the lender will definitely receive the collateral assets. The lender can choose to hold the NFT purchased at a discounted price or sell it for cash. The lender will not miss the best opportunity to restore liquidity.