How it Works

Here's the quickest overview on LotusSwap AI's pool parameters and its relationships (~5 mins):

1. Asset pair: The asset pair of the pool (e.g., ETH/USDC).

2. Transition price (TP): The price level at which borrowers are expected to change their actions (whether to repay their loans).

3. APR: The annualised interest rate at which borrowing and lending occurs (subject to change after every lending/borrowing transaction).

4. Maturity: The date and time at which the pool expires.

5. CDP: A figure to assists borrowers and lenders gauge their loan's collateral factor and unit coverage respectively.

A LotusSwap AI pool is uniquely defined by its 1) asset pair, 2) transition price and 3) maturity. There can be multiple pools for the same asset pair (e.g., two ARB/USDC pools, one with 1 week maturity and another with 2 months maturity). Closing the borrow position at maturity

There are two possible scenarios at maturity with respect to the price action of the pair: 1) spot price of ETH > transition price and 2) spot price of ETH < transition price.

1) Closing the borrow position (at maturity) when spot price of ETH > transition price

Let's consider the case where the price of ETH remains at 1,000 ETH/USDC.

At maturity, the borrower's borrowed principal (i.e., cash on-hand) is 800 USDC.

The borrower's locked collateral is worth 1,020 USDC (locked collateral * spot price = 1.02 * 1,000).

Since the borrower's locked collateral is worth more than their borrowed principal, it makes more economic sense for them to repay the debt (and thus unlock the collateral).