The Paradox lending and borrowing platform allows users to deposit and lock their funds into smart contracts, from where other users can borrow and pay interest on them. Each loan is collateralized by crypto.
Users, who want to become lenders, supply their tokens to a particular money market and start receiving interest on their tokens according to the current supply APY.
The supplied tokens are sent to a smart contract and become available for other users to borrow. In exchange for the supplied tokens, the smart contract issues other tokens that represent the supplied tokens plus interest. These tokens can be redeemed for the underlying tokens.
How Paradox Works
Paradox protocol allows users to lend and borrow crypto-assets in a global, permission-less, transparent and very rapid way, without a middleman.
When making use of , users looking to become “lenders” need to supply their tokens into what is referred to as a “money market.” This is done so by an individual sending their assets to a smart contract — which serves as an automated digital intermediary — following which the coins become available to other users for borrowing.
The aforementioned smart contract issues interest tokens that are doled out automatically to the user and can be redeemed at a later stage in place for one’s underlying assets. The tokens that are minted are native to the platform, for example, in Aave the interest tokens are called aTokens, whereas on Maker they are referred to as Dai.
Almost all of the loans that are issued via the native tokens are over-collateralized, which basically means that users who want to borrow funds are required to provide a guarantee — in the form of crypto — that is worth more than the actual loan itself.
PROBLEM OF THE CURRENT SYSTEM
Most of us would be familiar with the traditional methods of borrowing and lending. If a person need to borrow some money to buy a house, their first instinct would be to go to a bank and take out a house loan. However, banks are essentially businesses, they generally charge high rates of interest, which can lead to a great loss of money on the borrower’s side.
Some people may join a credit union. Credit unions offer many of the same services as banks. But they are typically nonprofit enterprises, which helps enable them to lend money at more favorable rates or on more generous terms than commercial financial institutions. However, despite the lower rates of interest, they are unable to provide the variety of loan products that banks do.
Trusting a central authority with your assets and money can be nerve-wracking. This is because they are susceptible to human error, fraud and corruption. Fairly rare, but its a big possibility. There are several occurrences of higher-level bank officials who make human errors and commission loans unethically.
Such situations have led to serious trust concerns with the traditional method of borrowing and lending money. But what if it was possible to rule out the centralized nature of financial systems?
How would such a system even work?
Peer-to-peer lending solves this problem to a certain extent. Essentially, it is a method of financing that allows individuals to borrow and lend money without the use of an official financial institution as an intermediary. Through peer-to-peer lending, borrowers receive financing from individual investors who are willing to lend their own money for an agreed interest rate. Both parties can connect through a peer-to-peer online platform.
Borrowers display their profiles on these sites, where investors can assess them to determine whether they would want to risk extending a loan to that person. But this solution comes with its own set of problems. Firstly, it takes up much more time, energy and effort when compared to traditional banks. It also involves a lot of risk, since there is no fail-proof method of tracking and verifying payments. Additionally, these sites may charge loan origination fees, late fees, and bounced-payment fees. But what if we improve on this peer-to-peer lending concept by using blockchain technology?
Lending and Borrowing in DeFi
The Fintech revolution has provided an opportunity for people to have access to a multitude of financial services, regardless of their financial status or location. DeFi expands on this opportunity by decentralizing the lending and borrowing process. This leads to better security, accountability and transparency in the financial system. According to research conducted by Messari, DeFi lending is the top-performing category in terms of ROI, followed by decentralized exchanges and DeFi payments.
DeFi lending allows users to become lenders or borrowers in a completely decentralized and permissionless way while maintaining full custody over their coins.
DeFi lending is based on smart contracts that run on open blockchains, predominantly Ethereum. This is also why DeFi lending, in contrast to DeFi lending, is accessible to everyone without a need of providing your personal details or trusting someone else to hold your funds.
Aave and Compound are two main lending protocols available in DeFi. Both of the protocols work by creating money markets for particular tokens such as ETH, stable coins like DAI and USDC or other tokens like LINK or wrapped BTC.
Let’s take a look at how it works-
DeFi’s open lending protocols is similar to a bank’s protocol- Users can deposit their money and when someone borrows their digital assets, they earn an interest. However, instead of an intermediary, there are smart contracts to dictate the loan terms.
Once the smart contract has been deployed on the blockchain, it is self-executing and can’t be stopped unless both parties agree.
Due to the transparency and immutability of the blockchain, the lender earns high returns and is able to assess the risk more clearly.
The standardization and interoperability of the system can also minimize costs with automation.
Paradox is a protocol built on BEP20 ecosystem. Lenders and Borrowers of assets interact with the protocol directly in order to lend/borrow a floating interest rate, without having to negotiate any kind of terms such as maturity, interest rate, or collateral.
ParaTokens represent a user’s balance in the Paradox protocol. As the market earns interest, the tokens become convertible into an increasing amount of the underlying assets.
BNB and BEP-20 Tokens
Currently, most platforms, including Paradox, allow users to deposit BNB, certain BEP-20 utility tokens, and different kinds of stable coins.
BNB is a typical type I crypto asset. BEP-20 utility tokens generally constitute type II crypto assets as they can easily be exchanged with type I crypto assets. The same most likely applies to wrapped bitcoin as they are currently not used for payment and can only be exchanged with type I crypto assets.
Paradox uses a pooled loan model similar to dYdX or Compound where lenders provide capital to a pool which borrowers are then free to draw down provided they lock an adequate amount of collateral. Interest rates are derived from the proportion of loans borrowed to the total amount of capital in the pool, dynamically adjusting to account for market forces.
ParaTokens are interest accumulating tokens that are minted anytime a lender provides capital to a pool. ParaTokens accumulate value in real-time as they represent a share in the total loan pool that grows as borrowers repay loans plus interest. Once minted, tokens can be freely traded, used as collateral, or composed into structured financial products.
In order to reclaim their deposited capital, lenders can burn ParaTokens by sending them to the ParaTokens contract which immediately releases their funds. Alternatively, they can be sold on the open market for approximately the value they can be redeemed for as long as the market is operating efficiently and believes they remain fully backed. In the event loan utilization is over 100% and funds cannot be returned, lenders are placed in a queue until the pool is large enough to service the debt. If utilization ever reaches that high, interest rates will be very high which should attract enough lenders to allow prior ones to redeem their funds.
Let’s say a user wants to lend 10 BNB on Paradox and get some nice interest out of them. The user will go on the website, or access the protocol programmatically, and deposit their BNB in a supply pool. In exchange they will receive an equivalent value of ParaTokens.
ParaTokens are Interest bearing tokens, so if the user changes a ParaTokens some time later, they will get the original asset plus extra value, guaranteed. ParaTokens can always be converted into the original asset, based on the exchange rate of the moment.
On the other side of the marketplace, let’s imagine a user wants to borrow some DAIs: they can go to Paradox and get them in exchange for some other assets, for example bnb.
The user will deposit Bnb, more than the value that is asking to borrow as the loan has to be overcollateralized, and they will automatically get the DAI in exchange.
That order will be executed very quickly because Paradox collects all the supply assets in pools, so there is no need for the borrower to wait for a matching order on the lending side.
Under the hood, when the users post their collateral, those assets are transformed into ParaTokens that are used to over-collateralise the loan — and thus cannot be transferred. Users will be only allowed to borrow up to their borrowing capacity and no further. The borrowers will pay an interest rate on the loan that will then be distributed to the lenders through the ParaTokens.
Margin Trading Protocol
In a margin trade, a trader borrows an asset and immediately trades it for another asset. The asset must be repaid to the lender, usually along with interest, at a later date. Margin trading includes both short sells and leveraged longs.
In a short sell an investor borrows an asset and sells it for the quote currency. The investor makes money if the price of the asset decreases, since rebuying the asset to repay the lender costs less than the original sell-price. The investor loses money if the price of the asset increases, since rebuying the asset to repay the lender costs more than the original sell-price. The lender makes money from the interest paid by the trader.
In a leveraged long an investor borrows the quote currency and uses it to buy an asset. The investor makes money if the price of the asset increases, and loses money if it decreases. Gains or losses from the position are equal to the change in price of the underlying asset multiplied by the leverage ratio, which is the ratio of the sum of the borrowed amount plus the amount paid by the trader to the amount paid by the trader.
Liquidity mining, also known as yield farming, is the act of providing liquidity via cryptocurrencies to decentralized exchanges (DEXs). Since the primary goal of an exchange is to be liquid, DEXs seek to reward users willing to bring capital to their platform.
Paradox liquidity is a mechanism in which participants supply cryptocurrencies into liquidity pools, and are rewarded with fees and tokens based on their share of the total pool liquidity. Liquidity pools in Paradox consist of liquidity in pairs of coins, used by the Paradox DEX (Decentralized Exchange).