How to pick the right level for lending?
Follow this guide to best understand how to lend and earn in Ajna in the best way possible.
Last updated
Follow this guide to best understand how to lend and earn in Ajna in the best way possible.
Last updated
Oazo Apps 2023
Lenders in Ajna must select a price to lend out their tokens. This price can be understood as the level at which you believe borrowers offer enough collateral for your tokens: What Loan to Value would you offer. For example, if the price of wrapped bitcoin is $20,000 USDC, and you lend at $10,000 this means you are comfortable with borrowers taking up to 50% of their collateral as debt.
Another way of framing the lending price is thinking it as a limit order: At which price you would be willing to buy bitcoin with your current token holdings? If the price is the same as before, and you lend at $18,000 you are offering up to 90% LTV to borrowers. If the price of Bitcoin goes down, you are practically guaranteed to be left with WBTC instead of USDC.
This happens because if the lending price is higher than the market price, anyone can trade borrow tokens for collateral. Even if liquidations of borrowers are successful, you can expect that actors will trade your tokens for collateral once it goes below your lending price.
During liquidations, the highest lending prices deposits are frozen until the liquidations end and borrowers collateral is sold to recover the debt. In general, liquidations should take at least 6 hours to complete.
To avoid interest rate manipulation, the protocol charges 8 hours of interest on each deposit to the pool. All deposits are charges this fee, moving a position from a high price to a lower price also charges this fee. But when lenders move from lower to higher price, the fee is waived.
Each price in Ajna is distributed in a range. All prices are fixed, but the ranges change as more people lend and borrow and as the price of the tokens increases or decreases. Your position doesn't move, but as the price of the tokens changes, the ranges will, and you might not earn interest if it falls outside the range.
From the highest price downwards, we find the active liquidity range in green in the slider. This is the part of the tokens that are actively lent out. The active liquidity range ends at the Lowest Utilized Price(LUP): Borrowers take tokens from the highest price downwards. Once all borrowers are matched with lenders from the highest prices, we reach the most conservative lender at a price point called the Lowest Utilized Price. His deposit is being utilized, but deposits below his price are not. The LUP divides the pool between active liquidity and available liquidity.
Available liquidity: This range is marked in green. The available liquidity is not actively lent out, but it's ready to be used and gets paid interest for this reason. It sits between the LUP and the Threshold Price(TP) of the least collateralized loan. The TP is simply obtained by dividing the collateral by the total debt of each loan and picking the highest one.
This dividing price is called the Minimum Yield Price because below this level, no interest is paid. You can find information about this point by clicking the Position Lending Price tooltip in the Ajna Earn overview:
Unutilized liquidity: This section is marked in grey. Below the minimum yield Point, lenders earn no interest since they do no meaning liquidity provision. They are the unutilized liquidity. Liquidity in this range can become available liquidity again, and then move again into the active liquidity if the liquidity range moves down to include the prices here
For popular lending pools with highly liquid assets, you can lend in the active liquidity range, expecting the market to converge to a reasonable Loan to Value ratio. You should check that the value is sensible, and it's distant enough from the market price that a normal and not-so-normal day in crypto will cross it quickly. You can check against other protocols' preferred loan to value and see if it has changed recently or if the Ajna pool has converged in a completely different LTV.
By default, the slider is set in the active liquidity range, close to the available liquidity. This means you will be an active lender and you will get paid the interest for your position. This default lending price will change as the collateral price changes and if you wish to always be in the active liquidity you will need to update your position. You should still pick a lending price that's most convenient to you.
You can always deposit at the available liquidity range for more conservative lending. You still need to monitor that your selected price doesn't fall below the available liquidity range into the inactive range.
Depositing in the highest range carries the risk of your deposit being frozen during liquidations and even being left with collateral tokens. If your intention is to buy a particular token with your holdings and earn a yield while waiting for prices to go down, you can use Ajna in the highest range. But remember that if the price goes up again, then the collateral will be traded back for lend tokens.
Exotic pools: For less traded pairs, it's harder. As a permissionless protocol Ajna can enable many different lending conditions for multiple tokens. You should have a good idea of how to correctly price the right loan to value before depositing, you should check the general liquidity of the pool, if it's low it might indicate it's hard to rightly value the collateral. Some less traded pairs might have high rates for a reason, the risk of being left with collateral tokens might be really high. Don't rush to lend against tokens you wouldn't be comfortable holding.
