Borrowing and Repayment by Storage Providers (SPs)

How are the Filecoin staking interest rate and lending rate determined?

The FILLiquid smart contract also handles borrowing and repayment requests from SPs with financing needs. SPs can acquire FIL tokens from the smart contract by pledging their account balance and future income to the smart contract through their Beneficiary Address.

FILLiquid differs from traditional lending protocols as it doesn't require borrowers to overcollateralize their borrowing with mainstream cryptocurrencies, such as ETH, to secure a loan. Instead, FILLiquid adopts a unique risk management approach and takes the SPs' account balance and future income from storage mining as collateral.

As a result, the maximum borrowing amount for an individual SP is determined based on their pledgeable account balance. The total pledgable account balance recognized by the FILLiquid smart contract includes the following:

• PreCommit Deposits

• Initial Pledge

• Locked Funds

• Available Balance

Furthermore, the future rewards from storage miners also serve as additional collateral to mitigate default risks.

Since miners do not have direct control over the beneficiary address once pledged to the smart contract, they cannot withdraw FIL from the available balance. As the FIL borrowed can only be used to increase storage power, it also enters the beneficiary address and can be considered collateral.

This unique risk management approach allows FILLiquid to safely set the minimum collateralization ratio at 100% during its initiation phase.

Once a borrowing request is received, the SP's Beneficiary Address starts transferring to the smart contract's address. From that point on, the account balance and all future earnings of the SP are pledged as collateral by the smart contract. Upon completing the pledging process, the SP receives the intended borrowed FIL tokens.

The borrowing interest rates are algorithmically based, meaning they are automatically calculated by the smart contract and solely determined by the utilization rate. The utilization rate represents the total amount of FIL borrowed as a percentage of the total liquidity in the FIL lending pool at a specific time.

You can see the borrowing rates at their corresponding utilization rates in the following table;

A high utilization rate indicates high demand in the liquidity pool, leading to a higher borrowing interest rate. Conversely, a low utilization rate suggests low demand, which results in a lower cost of capital to attract borrowers.

The borrowing rate model allows for interest rate calibration at key points, and the parameters should be decided by the DAO (Decentralized Autonomous Organization). The loan interest is continuously compounded and accrued every epoch but is repaid along with the loan principal.

When borrowers request to repay the loan, the principal and interest payments are made together through the smart contract. The following table shows the interest rate (in percent) for some simulations. For example, let's assume an SP borrows at a 50% utilization rate with an 8% nominal annual interest rate (table above) and plans to repay the loan over 36 months. In that case, they would have to pay 27.12% of the principal as interest.

The repayments, both principal and interest, are then returned to the liquidity pool and become available for other SPs to borrow, reducing the utilization rate pressure.