Borrowing

Borrowing on CygnusDAO.

To understand CygnusDAO, we outline the fact that any time we borrow ANY volatile asset in DeFi (assuming information symmetry), we are in essence shorting the asset itself. When you borrow an asset, you must pay back the asset + accrued interests. What you owe is always the same asset, not the nominal value of it (e.g. owe the ETH, not the value of ETH).

Liquidity Pools usually consist of high APY which is earned from trading fees plus any liquidity mining rewards. Despite all these rewards, recent studies have shown that a lot of LPs are losing money by providing liquidity due to impermanent loss. As such, we could describe LPs as essentially hedgers against market volatility (if the market moves in any direction, they may lose money from Impermanent Loss).

UniswapV3 top 17 pools by volume. Fees Earned vs Impermanent Loss (source: https://arxiv.org/pdf/2111.09192.pdf)

Borrowing a stablecoin value against volatile assets is a risky play, but is also the dominant strategy when you believe your assets are worth holding. If you took out a stablecoin loan using your assets as collateral and the assets increase in value, it means now that your debt ratio is lowering and you can choose to borrow even more funds or just repay the loan selling less of your deposited assets than before, earning a profit from the difference. That's why in this sense it is much more rewarding for the borrower to borrow stablecoins and not just more of their LP Token's underlying assets ("pay back the ETH, not the value of the ETH").

Cygnus allows Liquidity Providers to borrow a stablecoin value using their liquidity as collateral, essentially going long on their liquidity. While impermanent loss still exists in this case, it is mitigated if their liquidity position starts rising in value.

This system also means that Liquidity Providers across DeFi can access more liquidity than before, as they can collateralize their liquidity position to obtain stablecoin loans and use it else where in DeFi. All liquidity that flows through Cygnus remains in DeFi, since Cygnus is completely built on top of other protocols such as Compound Finance, UniswapV2, UniswapV3, Gamma, Quickswap, Balancer, etc.

In this case the pool is using Compound Finance for stablecoin deposits, and Gamma for concentrated liquidity LPs. Every vault for lenders on Cygnus is built on top of another protocol, where we deposit any unused funds.

The most important part for borrowers to take note is of our collateralization model. Cygnus uses a Debt Ratio which borrowers must look towards to make sure their position does not reach liquidation levels. Once Debt Ratio is 100%, their position enters liquidatable state, allowing anyone to repay the loan and take a profit from the borrower's collateral.

If the assets of the liquidity position increase in price, the borrower's Debt Ratio decreases, allowing them to adjust their position and borrow even more. If the assets of the liquidity position decrease in price, the borrower must be careful and de-leverage their position to avoid liquidations. As such, it is important that borrowers monitor their positions frequently.

Lenders and Borrowers can use the Dashboard for a quick overview of their positions:

Borrow Dashbaord