📃Lending Terms Considerations

When making decisions about the loan terms, lenders and borrowers will look at this from two different perspectives. We'll try to outline the risk and rewards are for each participant in simple terms. They are not financial advice, nor will they cover everything and all possibilities. It merely serves as a guide for decision-making, but in the end, users should DYOR and manage their risks when dealing with any DeFi products and services.

Lender

(+) Lending Returns

The flexible lending mechanisms of Feeder's P2P lending enable a diverse set of collateral assets. Some of these assets will be yielding receipt tokens such as synthetic vaulted assets or staked assets. The tolerance of the borrower for higher rates of borrowing will exist, thus offering lenders far greater returns, especially when compared to typical lending pool alternatives.

(+) Liquidation Returns

While lending pools offer liquidators the benefit of liquidation both from collecting collaterals and liquidation fees, Feeder's P2P lending allows the lender to collect on the collateral asset themselves if they choose to. In a favorable scenario, the borrower has left behind collaterals that exceed the loan value, and the lender makes a profit.

(+) Optionality

Not only does the diverse set of collaterals create an opportunity for greater returns as lenders move up the risk curve of collateral assets, but it also offers tremendous optionality. A savvy lender could create a portfolio of diversified loans across a spectrum of risk curves, From lending with the safest collaterals of top tier projects or enhancing lending portfolio returns with a small or medium allocation to high-risk small-cap projects.

(-) Price Risk

The lender needs to be fully aware of the price risk of the collaterals when considering accepting bids or bidding on loans. A more volatile token has a higher risk of its value falling below the level at which it would cover the value of the capital lent to the borrower. Collaterals value dropping below the loan value would likely lead to borrowers not returning funds and purposely entering liquidation.

Therefore, the higher the token's (or the market's) volatility, the lower the Loan-to-Value and the higher the APR.

Volatility UP --> LTV DOWN = MORE Collaterals

Volatility UP --> APR UP = More Interests

(-) Liquidity Risk

On the other hand, duration also plays a role in managing risk, mainly because the loan can't be terminated unless the borrower returns funds.

Therefore, the higher the token's (or the market's) volatility, the shorter the loan duration and the higher the APR.

Volatility UP --> Duration DOWN = SHORTER Term

Volatility UP --> APR UP = MORE Interests

(-) Yielding RT Risk

While the scenario is rare, it is not impossible in DeFi for protocols to be exploited. Lenders need to be aware and understand the risk of borrowers collateralizing yielding receipt tokens where the underlying token is being yield-optimized or staked inside a separate smart contract. The borrower will unlikely return funds if those assets are exploited and cease to have value.

Therefore, the higher the exploit risk, the lower the LTV and the higher the APR.

Exploit Risk UP --> LTV DOWN = More Collaterals

Exploit Risk UP --> APR UP = MORE Interest

Borrower

(+) Liquidity

Feeder's P2P lending is highly complementary to borrowers. While lenders do not have liquidity, the borrowers do. Funds can be returned, but also not necessarily. While defaults and liquidations will be recorded on-chain and could result in a particular wallet finding it harder to borrow funds in the future, it is still part of the intended mechanism.

(+) Effective Insurance

As yielding assets can be used as collateral, loans taken out using these assets constitute effective insurance on the asset. Take a rare scenario where a vaulted asset was exploited. A borrower taking a 50% LTV loan would keep the borrowed asset and take a 50% hit rather than being completely wiped out, transferring the risk to the lender in the process.

(-) Borrowing Costs

Depending on the collateral, the lender is likely to demand interests, LTV, and duration commensurate to the risk of those assets. The asset has embedded exploit risk, especially when the underlying asset is being yield-optimized in a vault or staked in a staking pool. At top-tier projects, the risk is low, but at non-top-tier projects, that risk may be higher and require higher borrowing costs.