Decentralized finance (DeFi) gives individuals access to powerful financial products and markets, such as crypto lending, in which users lock their crypto assets as collateral for a loan.
However, existing DeFi lending apps have a number of inefficiencies. Cosmos-based DeFi financial suite Nolus Protocol aims to address these inefficiencies with a new concept, the DeFi Lease. Here’s how it works.
The DeFi Lease applies the model of leasing from traditional finance to the world of decentralized finance.
Conventional leasing enables customers to secure assets by paying a portion of their total value upfront; they can use them for the duration of the lease, and take full ownership after settling the loan.
With the Nolus DeFi Lease, users can deposit cryptocurrency into the Nolus Protocol and receive up to 150% financing on the initial investment, gaining additional exposure to tokens while addressing crypto’s stringent over-collateralization requirements.
In conventional crypto lending, users employ overcollateralized loans, locking up a higher value in crypto as collateral than they intend to borrow. While this limits the risk of liquidation, should the collateralized tokens drop in value, it introduces inefficiencies.
Overcollateralized loans lock up collateral that could be used to minimize counterparty risk. DeFi leasing on Nolus mitigates against this by offering financing up to 150% on the initial investment, reducing the level of collateralization by a factor of 3.
Traditional liquidation methods employed in DeFi also represent a significant risk to borrowers, whose entire position can be liquidated at a discount. Nolus employs partial liquidations, which only liquidate a portion of the collateral when the asset price drops by around 30%, giving borrowers more time to recover their position. Nolus claims that liquidation rates for its DeFi lease are 40% lower than the market average (all parameters equal).
Nolus also locks interest rates at the moment the DeFi lease smart contract is created, addressing the issue of variable interest rates on conventional DeFi lending solutions.
While parked in the smart contract, the leased assets are locked alongside the downpayment. However, users can put the underlying leveraged assets to work for them, using yield bearing strategies whitelisted by Nolus. Once the loan is fully repaid, the user gains complete ownership over the underlying assets.
A Nolus user can increase their exposure to desired crypto assets using the DeFi Lease.
First, they deposit a cryptocurrency into Nolus, borrowing up to 150% of the initial down payment from the platform, denominated in their preferred cryptocurrency. Supported assets include ATOM, OSMO, TIA, AKT, NTRN, wrapped Bitcoin and Ethereum, and many more.
The down payment and the loan are automatically swapped into their desired cryptocurrency, effectively leveraging their holdings up to 150% of their initial investment. Both the down payment and the loan are stored in a smart contract instance, acting as collateral and reducing the margin call risk.
The user can repay the loan either by providing more funds, or repaying it using the assets within the DeFi Lease itself, assuming the price of the asset has appreciated.
The protocol operates on a cash-basis model, rewarding lenders with real yield from leases. Interest is due for collection every 16 days. If it isn’t paid by the user, the interest is automatically deducted from the borrower’s position and distributed to lenders.
The system aims to ensure that interest accrued from leases is promptly shared with lenders, while limiting new deposits when fund utilization is below optimal in order to secure controlled returns for existing lenders. The annual percentage yield (APY) on stablecoins ranges from 8 to 12%, according to Nolus. A further 12% in rewards is paid out in the protocol’s native token, NLS, which is bought back from the open market with the protocol’s revenue.