Liquidity Risk
For peer-to-pool loans
Overview
FRAKT is an NFT liquidity and lending protocol that enables borrowing SOL from the liquidity pools. Depositors receive SOL rewards, in exchange for their SOL deposits.
The liquidity of the protocol is the availability of the capital to face business operations: borrowing amounts and redeeming SOL. It is a key metric, as lack of liquidity will block business operations.
At any point in time, the liquidity of the protocol can be assessed through the utilization ratio: the share of reserve that is currently borrowed. Capital provided in lending pools can only be withdrawn if there is enough unused liquidity in the pool, therefore loans might need to be repaid and/or new liquidity might need to be provided to the pool in order for depositors to be able to withdraw their deposits
Interest Rate Model
FRAKT’s interest rate model is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates come from the Utilization Rate U.U is an indicator of the availability of capital in the pool. The interest rate model is used to manage liquidity risk through user incentivizes to support liquidity:
When capital is available: low interest rates to encourage loans.
When capital is scarce: high interest rates to encourage repayments for the loans and additional deposits.
A distinct model for each type of loans
Reserve factor and ecosystem reserves
The 30% reserve factor for Perpetual loans and Isolated lending pools is a safety mechanism that is progressively fueling the ecosystem reserves. These reserves are being accumulated and stored in case of bad dept or any black swan event happening so the protocol can repay lenders in such cases
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