Borrowing
Why would I use Meridian for borrowing?
Meridian 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 Ether to have liquid funds, you can use the protocol to lock up your ETH, borrow against the collateral to withdraw USDM, and then repay your loan at a future date.
For example: Borrowers speculating on future ETH price increases can use the protocol to leverage their ETH positions up to 11 times, increasing their exposure to price changes. This is possible because USDM can be borrowed against Ether, sold on the open market to purchase more ETH — rinse and repeat.*
*Note: This is not a recommendation for how to use Meridian. Leverage can be risky and should be used only by those with experience.
What do you mean by collateral?
Collateral is any asset which a borrower must provide to take out a loan, acting as a security for the debt. Currently, Meridian only supports ETH as collateral.
Is Ether (ETH) the only collateral accepted by Meridian?
Yes, ETH is the only collateral type accepted by Meridian.
How can the Meridian offer interest-free borrowing?
The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the last redemption time. For example: If more redemptions are happening (which means USDM is likely trading at less than 1 USD), the borrowing fee would continue to increase, discouraging borrowing.
How can I borrow with Meridian?
To borrow you must open a Trove and deposit a certain amount of collateral (ETH) to it. Then you can draw USDM up to a collateral ratio of 110%. A minimum debt of 200 USDM is required.
What is a Trove?
A Trove is where you take out and maintain your loan. Each Trove is linked to an Ethereum address and each address can have just one Trove. If you are familiar with Vaults or CDPs from other platforms, Troves are similar in concept.
Troves maintain two balances: one is an asset (ETH) acting as collateral and the other is a debt denominated in USDM. 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 USDM from your Trove, a one-off borrowing fee is charged on the drawn amount and added to your debt. Please 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 20 USDM Liquidation Reserve charge will be applied as well, but returned to you upon repayment of debt.
Another consideration is the price of USDM at the time of repayment. If at the time you want to repay your loan USDM is trading at $1.02 on the market and you need to buy it, you are incurring a 2% 'fee'. You can avoid this by having your borrowed funds readily available or by being able to wait for USDM to return to peg.
How is the borrowing fee calculated?
The borrowing fee is added to the debt of the Trove and is given by a baseRate . 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 wants to receive 4,000 USDM to their wallet. Being charged a borrowing fee of 20.00 USDM, the borrower will incur a debt of4,040 USDM after the Liquidation Reserve and issuance fee are added.
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 110%.
What is the collateral ratio?
This is the ratio between the Dollar value of the collateral in your Trove and its debt in USDM. The collateral ratio of your Trove will fluctuate over time as the price of ETH changes. You can influence the ratio by adjusting your Trove’s collateral and/or debt — i.e. adding more ETH collateral or paying off some of your debt.
For example: Let’s say the current price of ETH is $3,000 and you decide to deposit 10 ETH. If you borrow 10,000 USDM, then the collateral ratio for your Trove would be 300%.
\frac{10 ETH \ * \ $3.000}{10.000 \ USDM} * 100\% = 300\%
If you instead took out 25,000 USDM 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 10,000 USDM, you would need at least $11,000 worth of Ether posted as collateral to avoid being liquidated.
To avoid liquidation during Recovery Mode, it is recommended to keep ratio comfortably above 150% (e.g. 200% or better 250%).
What happens if my Trove is liquidated?
You lose your collateral as your debt is paid off through liquidation, 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 9.09% (= 100% * 10 / 110) of your collateral’s Dollar value.
What is the Liquidation Reserve?
When you open a Trove and draw a loan, 20 USDM is set aside as a way to compensate gas costs for the transaction sender in the event your Trove being liquidated. The Liquidation Reserve is fully refundable if your Trove is not liquidated, and is given back to you when you close your Trove by repaying your debt. The Liquidation Reserve counts as debt and is taken into account for the calculation of a Trove's collateral ratio, slightly increasing the actual collateral requirements.
What happens if my Trove is redeemed against?
When USDM is redeemed, the ETH provided to the redeemer is allocated from the Trove(s) with the lowest collateral ratio (even if it is above 110%). 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 USD value by which your ETH collateral is reduced corresponds to the nominal USDM amount by which your Trove’s 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.
Let’s say you own a Trove with 2 ETH collateralized and a debt of 3,200 USDM. The current price of ETH is $2,000. This puts your collateral ratio (CR) at 125% (= 100% * (2 * 2,000) / 3,200). Let’s imagine this is the lowest CR in the Meridian system and look at two examples of a partial redemption and a full redemption:
Example of a partial redemption
Somebody redeems 1,200 USDM for 0.6 ETH and thus repays 1,200 USDM of your debt, reducing it from 3,200 USDM to 2,000 USDM. In return, 0.6 ETH, worth $1,200, is transferred from your Trove to the redeemer. Your collateral goes down from 2 to 1.4 ETH, while your collateral ratio goes up from 125% to 140% (= 100% * (1.4 * 2,000) / 2,000).
Example of a full redemption
Somebody redeems 6,000 USDM for 3 ETH. Given that the redeemed amount is larger than your debt minus 20 USDM (set aside as a Liquidation Reserve), your debt of 3,200 USDM is entirely cleared and your collateral gets reduced by $3,000 of ETH, leaving you with a collateral of0.5 ETH (= 2 - 3,000 / 2,000).
How can you offer a collateral ratio as low as 110%?
By making liquidation instantaneous and more efficient, Meridian needs less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.
How can I take advantage of leverage?
You can sell the borrowed USDM on the market for ETH and use the latter to top up the collateral of your Trove. That allows you to draw and sell more USDM, and by repeating the process you can reach the desired leverage ratio.
Assuming perfect price stability (1 USDM = $1), the maximum achievable leverage ratio is 11x. It is given by the formula:
maximum leverage ratio =where MCR is the Minimum Collateral Ratio.
Leveraged borrowing can be risky as both the profits and losses of a position are increased. This should only be undertaken by experienced investors
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.
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