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Borrowing

Why would I use Virtue for borrowing?​

Virtue 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 wSMR to have liquid funds, you can use the protocol to lock up your wSMR, borrow against the collateral to withdraw vUSD, and then repay your loan at a future date.

Example use cases for the 0% interest loans could be:

  • Taking a leverage long position on wSMR, note leverage can be risky
  • Settle expenses or purchase an asset such as a car, house or other crypto asset
  • Utilize vUSD to earn a yield on Virtue and or other DeFi platforms

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, Virtue only supports wSMR as collateral, however we have the option to accept other forms of collateral in the future after careful analysis.

How can the protocol 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 vUSD is likely trading at less than 1 USD), the borrowing fee would continue to 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, Virtue instead opts for a fully decentralized and direct feedback mechanism via one-off fees.

How can I borrow with Virtue?​

To borrow you must open a position and deposit a certain amount of collateral (wSMR) to it. Then you can draw vUSD up to a collateral ratio of 110%. A minimum debt of 100 vUSD is required.

What is a position?​

A position is where you take out and maintain your loan. Each position is linked to a ShimmerEVM address and each address can have just one position. If you are familiar with Vaults or CDPs from other platforms, positions are similar in concept.

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

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

Do I have to pay fees as a borrower?​

Every time you draw vUSD from your position, 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 10 vUSD Liquidation Reserve charge will be applied as well, but returned to you upon repayment of debt.

Another consideration is the price of vUSD at the time of repayment. If at the time you want to repay your loan vUSD 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 vUSD to return to peg.

How is the borrowing fee calculated?​

The borrowing fee is added to the debt of the position 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 vUSD to their wallet. Being charged a borrowing fee of 20.00 vUSD, the borrower will incur a debt of 4,030 vUSD 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 position 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 position and its debt in vUSD. The collateral ratio of your position will fluctuate over time as the price of wSMR changes. You can influence the ratio by adjusting your position’s collateral and/or debt — i.e. adding more wSMR collateral or paying off some of your debt.

For example: Let’s say the current price of wSMR is $3 and you decide to deposit 10,000 wSMR. If you borrow 10,000 vUSD, then the collateral ratio for your position would be 300%. If you instead took out 25,000 vUSD that would put your ratio at 120%.

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 position has a debt 10,000 vUSD, you would need at least $11,000 worth of wSMR 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 position 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. You do however keep the debt position (vUSD), only the collateral secured in Virtue is liquidated.

What is the Liquidation Reserve?​

When you open a position and draw a loan, 10 vUSD is set aside as a way to compensate gas costs for the transaction sender in the event your position being liquidated. The Liquidation Reserve is fully refundable if your position is not liquidated, and is given back to you when you close your position by repaying your debt. The Liquidation Reserve counts as debt and is taken into account for the calculation of a position's collateral ratio, slightly increasing the actual collateral requirements.

What happens if my position is redeemed against?​

When vUSD is redeemed, the wSMR provided to the redeemer is allocated from the position(s) with the lowest collateral ratio (even if it is above 110%). If at the time of redemption you have the position 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 wSMR collateral is reduced corresponds to the nominal vUSD amount by which your position’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 positions, making them less risky.

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

Let’s say you own a position with 2000 wSMR collateralized and a debt of 2,400 vUSD. The current price of wSMR is $1.50. This puts your collateral ratio (CR) at 125% (= 100% * (2000 * 1.5) / 2,400). Let’s imagine this is the lowest CR in the Virtue system and look at two examples of a partial redemption and a full redemption:

Example of a partial redemption

Somebody redeems 1,200 vUSD for 800 wSMR and thus repays 1,200 vUSD of your debt, reducing it from 2,400to 1,200 vUSD. In return, 800 wSMR, worth $1,200, is transferred from your position to the redeemer. Your collateral goes down from 2000 to 1200 wSMR, while your collateral ratio goes up from 125% to 150% (= 100% * (1200 * 1.5) / 1200).

Example of a full redemption

Somebody redeems 6,000 vUSD for 4000 wSMR . Given that the redeemed amount is larger than your debt minus 10 vUSD (set aside as a Liquidation Reserve), your debt of 2,400 vUSD is entirely cleared and your collateral gets reduced by $2,390 of wSMR, leaving you with a collateral of 406.66 wSMR (= 2000 - 2,390/ 1.5).

How can you offer a collateral ratio as low as 110%?​

By making liquidation instantaneous and more efficient, Virtue 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 vUSD on the market for wSMR and use the latter to top up the collateral of your position. That allows you to draw and sell more vUSD, and by repeating the process you can reach the desired leverage ratio.

Assuming perfect price stability (1 vUSD = $1), the maximum achievable leverage ratio is 11x.

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

If positions 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.