Nolus Protocol: 1.5 times DeFi leverage, dare to add?

Original author:JackBlockBeats

Since the crypto market "into the bear", one after another centralized institutions thunder, no risk control, leverage directly to the top of the investment trading strategy, so that industry participants to avoid the word "leverage". Under the influence of the market, the decentralized financial world can also be described as "miserable", with serious decline in TVL and few trading volumes. However, in this context, Nolus Protocol's DeFi loan program, which claims to achieve 150% leverage, still caught my attention. With an interesting borrowing and clearing mechanism design, Nolus appears to have partially solved the "excess mortgage dilemma" that has plagued DeFi's fund utilization.

DeFi Lease

The Nolus protocol is built on the Cosmos SDK and is intended to achieve low fees in a decentralized environment while sharing the infrastructure and mobility of the Cosmos ecosystem through IBC. The team proposed the concept of "DeFi Lease" in response to a series of problems caused by excessive mortgage and high liquidation rate in the current DeFi field. The Nolus team defines DeFi Lease as a money market between borrower and lender that allows borrowers to leverage their funds up to 150%, thereby facilitating capital utilization in DeFi and the crypto space as a whole.

DeFi Lease is a smart contract system where Nolus automatically creates a smart contract entity for the borrower after the borrower determines the deposit and loan amount to be paid, and then deposits the down payment deposit and loan funds into the entity. Borrowers can perform various DeFi operations such as trading, pledging, providing liquidity, etc., on other sovereign chains in the Cosmos ecosystem through Cosmos cross-chain accounts (ICA), while Nolus agreements are relatively neutral and mitigate external risks.

The Nolus agreement will first support Cosmos Ecology's mainstream AMM Osmosis, where every lending position on Nolus can be traded and LP activity through Osmosis's liquidity pool, and liquidation of the position also takes place at Osmosis. In the future, the team also hopes to establish interoperability with Cosmos Ecodefi projects like dYdX through IBC and ICA technologies.

Lending structure and liquidation mechanism

When a loan is made on Nolus, the borrower has full ownership of the underlying asset, including the down payment deposit and the loan funds, greatly increasing its leverage and market fund utilization. The borrower can trade all the assets in the DeFi Lease entity into other tokens or convert them into liquid collateralized derivatives, such as stATOM and stOSMO, while the contract entity automatically uses the proceeds earned by the borrower to pay the principal and interest. Currently, the main sources of income for Nolus borrowers are liquidity pledge incentives and Token premiums.

The borrower is entitled to all collateral incentives received because liquid collateral derivatives generate collateral incentives. Nolus automatically accumulates these pledge awards to the borrower's stATOM or stOSMO position and uses them to repay the interest accrued on the loan. If the pledge award exceeds the interest, the DeFi Lease can also use the proceeds of the surplus to pay down part of the principal of the loan. In addition, the Nolus agreement also allows the borrower to automatically sell some of the funds to pay the principal when the price of the tokens held in the DeFi Lease contract entity rises.

Nolus lending structure diagram

In contrast to the loan structure, the Nolus Protocol's resolution mechanism is more innovative. The key is to treat both the borrower's deposit and the lender's principal as collateral.

Assuming the borrower uses 10 ATOM as a down payment deposit and borrows 15 ATOM from Nolus, his DeFi Lease contains a total of 25 ATOM worth more than the 15 ATOM offered by the lender. The borrower can participate in various DeFi activities with 25 ATOM of the contract, and Nolus automatically sends a margin call to the borrower when the value of the asset held in the contract drops and approaches the lender's principal.

If a borrower does not make a margin call on time, Nolus will begin a partial liquidation of the loan position in the contract entity to restore the borrower's LTV (loan-to-value ratio) to a safe level and the outstanding interest incurred on the loan will be paid off in this partial liquidation. Liquidation is done automatically by Smart contracts on Osmosis, the funds obtained from the sale of the collateral and the interest generated are returned to the lender, and the agreement will always ensure that the value of the collateral in the contract entity is greater than or equal to the value of the principal plus interest of the lender.

Schematic diagram of Nolus clearing mechanism

All of the above functions are adjusted periodically to ensure that the agreement provides a sustainable economic model for stakeholders. Revenue from the agreement is then used to automatically repurchase Nolus native Token NLS in the open market and refill the incentive pool of lenders, thereby maintaining long-term attractiveness to lenders. As the adoption of the agreement increases and TVL increases, larger Token buybacks will occur and more rewards will be distributed to lenders.

Risk and innovation

As with any DeFi agreement, Nolus carries some risks. The most obvious, of course, was that Nolus also adopted a partial liquidation mechanism to mitigate the risk of a position being liquidated due to a decrease in collateral value due to market conditions. The most important thing for users to pay attention to is the contractual risk of DeFi Lease. Since the funds are not directly held by the user's wallet, both lenders and borrowers will face serious losses if the contractual entity goes wrong.

At present, the funds lent by users through Nolus still only have limited use scenarios and strategies, namely Osmosis trading and liquidity pledge, unable to carry out more complex DeFi operation, only equivalent to a leverage contract for users in disguise. As Nolus builds interoperability with more DeFi protocols, this issue will be resolved to some extent. In addition, users are also exposed to the risk of decoupling of liquidity collateral derivatives, especially after the Lido stETH decoupling incident, this aspect of risk has received increasing attention, although historically such derivatives have been highly resilient, But users must also consider the possibility of such risk when exchanging borrowed money for assets such as stATOM.

DeFi Lease's borrowing structure and clearing mechanism enable the funds market to improve the utilization of funds in a relatively low-risk environment, setting a precedent for moving away from the DeFi excess mortgage paradigm. Combined with fixed lending rates, this model also creates a predictable and efficient lending environment and source of cash flow. The technical advantages of IBC provide high interoperability and high quality ecological support for Nolus. Currently, Nolus protocol is still in the invitation testing phase, but its novel mechanism design has attracted the attention of many deep DeFi users. In any case, breaking through the excess mortgage dilemma and improving the utilization of funds will always be a major challenge for DeFi products, and the future performance of Nolus protocols is worth watching.

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