[DRAFT] Maya Dynamic Interest Lending

Overview

Dynamic Interest Lending allows users to deposit collateral, then create debt at a fixed collateralization ratio CR (collateralization ratio). The debt can be denominated in USD or CACAO (despite what asset the user receives). These loans have dynamic interest (as a function of the protocol's and specific pool's collateral vs. pool depth), no liquidations, no caps and no expiration. Risk is contained by slip-based fees when opening and closing loans, dynamic virtual pool depth of derived assets, and a circuit breaker on CACAO supply after which short-term obligations are swiftly converted to long-term obligations.

This design is heavily inspired by Thorchain's Lending thorchain/thornode#1412 (closed)

Note that this design will only be implemented if Maya's implementation of the CACAO Pool is implemented first to entirely neutralize leverage of Synths & Savers to LPs #59 (closed)

WHY

Lending will bring fresh exogenous capital from new users to scale liquidity (both TVL and security), and drive up capital efficiency of pools and pool income, increasing system income and real yield. It also brings Maya closer to feature parity with the CEX experience.

Design Goals

The primary design goals are:

Minimal Cognitive Burden. The simplest UX around collateral, debt, and loan terms should be pursued.
Dynamic Conditions. Having fixed conditions (like 0% interest) represents a burden on the protocol, so must be avoided.
No caps. Economic designs flourish with diversity and heterogenous distribution of entrance and exit. Caps skew distributions to a smaller set of conditions in time (100% pre-cap, 0% post-cap), increasing risk.
Scalable Security. The collateral should always be secured, growing collateral should incentivize more liquidity pooling & loan closures.
Contained Risk. The risk of new debt being opened too fast should be throttled, and the risk of existing debt exceeding the liquidity of the system should be contained by a transparent circuit breaker.
Lasting equity. Some CACAO will perma-burn from the Total Supply, not to be minted again.

Collateral & Debt

Collateral

The collateral should be any asset with a pool on Maya, eg. BTC.BTC, THOR.RUNE! or ARB.TGT and the debt can be USD-denominated (nominal interest rate) or CACAO-denominated (at twice the interest rate).

The debt can be be CACAO denominated because, despite users shorting CACAO, the LPs are being long CACAO and getting paid a growing dynamic funding rate for it. The collateral should not be CACAO denominated because it won't bring fresh exogenous capital to the system, and it would create sell pressure on CACAO. That said, there might be a case for allowing CACAO Pool Units as valid collateral, with interest & liquidations; but this would be a separate proposal.

Wrapped vs Synthetic vs Derived Assets

All 3 types can achieve layer1 exposure, but only 1 can work:

Wrapping assets are incompatible with Maya's Liquidity Node over-collateralized security model thus can be ruled out, because a security budget cannot be built from entry-carrying-exit fees.
Synthetic Assets using pooled liquidity could work, but are competing for the same security space as the Savings + LP features, which have a cap. Thus the system would lock up and could not scale. There is also CACAO-ASSET IL risk to cover.
Derived Assets using CACAO equity can scale fast, drive price action into $CACAO and attract fresh capital to the system. There is CACAO-ASSET price risk to cover.

Debt Denomination

Denominating in an external stablecoin creates a third-party dependency/risk (various centralization concerns). Denominating against a median-priced manipulation-resistant basket of stablecoins is much safer. This is the design of $MOAR.

$MOAR as a unit of account is already not yet live today but has been proven to work well in Thorchain's $MOAR design. Maya would have to invest in increasing the diversity of its stablecoin suite to achieve this.

$MOAR, whilst technically an algo-stable, will not be transferrable and will have no other use than being an internal unit of account. Thus, the market cap of $MOAR is always zero (unless the community decides later to open $MOAR as a general-purpose asset, which is outside the discussion of this lending feature).

Denominating in CACAO is quite easy as CACAO/ASSET ratio are constantly being arbed by external players for profit. Since $CACAO has as of yet no external market at play in CEX or other DEX's, the risk to opening a short market within Maya is greatly diminished. Additionally, if there is a shorting market, it is best to have it internally as players intentionally shorting CACAO within Maya simultaneously have an interest in Maya's continued safe existence to ever recuperate their collateral. This is not the case in external short positions, where an attacker could short CACAO and attack Maya Protocol at a profit, as there is no need for Maya to exist for them to cash-in their short position.

Having two types of debt makes conditions more heterogenous and diverse, reducing the risk that ASSET-CACAO, ASSET-USD and CACAO-USD ratios are all unfavorable to the LPs of a pool at the same time. Having lending available for all pools also reduces risk for the same reason.

Loan Terms

Interest Rates

Interest Rates are a mechanism to collect income on debt. While it does increase the propensity of a user to pay back their loan, it compensates the party underwriting the loan to front and store liquidity in the opportunity. While Maya's design enjoys a loan that is never paid back due to the increase in TVL and burning of CACAO, it also enjoys the income from interest to LPs driving system income and continuous TVL attraction. The interest on the debt also means small & gradual CACAO minting to pay LPs of the pool at various times, instead of at the worst time on closure of the loan by the user. This means there is also less CACAO to be minted at closure and LPs are constantly incentivized.

Interest rate per year will be paid per block and set per pool as a function of collateral vs. pool depth. It can be the case that Collateral Value - Outstanding Debt value > Pool Depth despite collateral added becoming part the pool depth at open since collateral value can increase faster than LP value of the pool can, given AMM rebalancing. Thus, MinRate and CapacityRate are set by Mimir, where the interest rate scales linearly from zero at Collateral Value / PoolDepth = 0 to CapacityRate when Collateral / PoolDepth = 1 and beyond. Interest Rate of a pool can thus be greater than CapacityRate and can never be lower than zero.

Then, simply a pool calculates Interest Rate as CapacityRate * Collateral Value / PoolDepth and every block triggers CACAO minting of the amount Pool Depth * LPinterestShare (0-10000 bps) * Interest Rate / Block Per Year and adds it to cacao_balance of the Pool (without minting any pool units) and every lender's outstanding debt is increased to Debt * (1 + Interest Rate / Block Per Year) for every USD-denominated loan and Debt * (1 + CacaoLoanPremium * Interest Rate / Block Per Year) for every CACAO-denominated loan, per Pool (LPinterestShare (0-10000 bps) = 5000 & CacaoLoanPremium = 2 by Mimir). Because not all of the increased debt is minted to pay the LPinterestShare, there is still a net burn of CACAO in this process.

If supply cap of CACAO is hit, the Interest Rate is still added to outstanding loan's debt but no CACAO is minted over the cap to pay LPs. When the difference between the current supply and the max supply is greater than block's total interest payout, then that amount of CACAO is minted and paid out to LPs (thru the cacao_balance of each pool). This again incentivizes Liquidity & TVL to increase over Lending experience, prioritizing LPs influx to bring the system back to solvency.

CapacityRate in turn is calculated as Total Collateral Value / TVL * TopRate where TopRate is set by Mimir. Thus both global and local conditions of the protocol and pool respectively are dynamically taken into account for the ending interest rate experienced by borrowers of a Pool, and the leverage CACAO experiences globally increases interest income experienced by LPs taking it on.

CACAO Perma Burn

The remaining interest (1 - LPinterestShare) is deducted from MaxSupply, in other words, it is Perma-Burnt CACAO from the Supply forever. This is done to have ever-lasting increase in protocol equity, and while gradual, can be very significant over the long run. This also continuously sheds inflation risk to incumbent LPs & Holders over time, as this burnt CACAO cannot be reminted to pay back collateral.

No Liquidations

Unique to this Maya Dynamic Interest design and Thorchain's lending design, is that it is irrelevant if the collateral drops below the debt value because the collateral is the liability, not the debt. If the collateral goes to zero, the liability also goes to zero.

The liability is the collateral, which is stored as equity (CACAO). If the collateral value out-paces the CACAO value, then the liability increases. Liability around debt-collateral is only created when the CACAO-ASSET or CACAO-USD price drops AND the loan is paid back.

Liquidating collateral contains risk on a per-loan basis. However, it creates very poor UX (distressed sales at the bottom and liquidation cascades), and causes the user to worry about the price of an unrelated third asset: CACAO when debt is USD-denominated, thus is untenable to the design goals.

Thus instead of liquidations, the protocol will tolerate an increase in CACAO supply to its MaxSupply, before triggering a circuit breaker where reserve will now be liable to pay collateral conitnuously from it's 5-10% of swap fees earnings overtime. Thus, any loan paid back after CACAO MaxSupply is hit will not be paid by the minting of CACAO. Instead, the Collateral Obligation in the Pool and on the users Loan of the asset will be recorded and the reserve to cover its payback from its inflows overtime (after having derived slip fees from the exit deducted) at a future block's rate. Note there is no mass devaluation of CACAO as only the small & sustainable future earnings of reserve are committed, with infinite time; and not infinite supply of CACAO in a short time. This also makes it likely that CACAO recuperates quickly after having converted short-term obligations into longer-term ones, akin to a Chapter 11 Bankruptcy where the business remains in operations and only renegotiates credit terms. Thus, a loan holder can choose to close the loan at the unfavorable time for the protocol and get paid back overtime, or instead choose to wait for a more favorable time to the protocol to close and get paid back immediately.

Since terms are clear from the beginning, it is also less likely that players panic. Even if they do, shallower derived pool depths in high volatility periods will ensure system income during turmoil and the collateral obligation system will provide an orderly exit to loan closures that would otherwise make the protocol insolvent. Continued operations and solid CACAO supply will provide users with confidence in the eventual repayment of protocol commitments and slowly bring the system back to balance. It is likely that during these times interest rates are high, being a large incentive for risk-taking LPs to provide the needed liquidity to increase TVL & CACAO price, as LPs here bet that either CACAO price will recuperate or that interest rate on outstanding debt for the collateral will offset the risk profile. Again the dynamic nature of the system comes at play here allowing for players to deploy liquidity according to their thesis. Thus, the risk of lending is underwritten by... lenders/borrowers, as they bet that the system will remain solvent and carry the risk if it is not. Note that aside from leverage and income, LPs do not underwrite the loans closure to infinity, the reserve does over the long run.

Once CACAO supply again drops below the desired MaxSupply, any new loans closed are paid normally from the minting of CACAO. Given the nature of CACAO's lack of reserve emmissions and it's circulating supply mostly in-protocol, there are better guarantees of CACAO equity stored from loan openings to remain at loan-closure.

Loan Repayment Maturity

LoanRepaymentMaturity will be set to a number of blocks which can for example be 1 month, before which a loan may not be closed. This ensures short term opportunistic loan players are not attracted and a minimum amount of income will be levied on the open loan.

A user's pending Collateral Obligation may be used to open a new loan of the same pool instead of Layer1 collateral to issue debt, but it is subject to LoanRepaymentMaturity once again. Thus, users that panicked before have a path to reconverting their outstanding/stuck Collateral Obligation being paid back gradually into a normal Loan once again and enjoy its debt for whatever use the user previously had.

Collateral Obligation Repayment

Collateral Obligation of a pool's loan is simple, if a loan's closure was going to pay out 1 BTC after deducting slip fees, the user will receive a 1 BTC unit of Collateral Obligation instead (given that the protocol has hit the CACAO MaxSupply limit and cannot and will not mint more CACAO). At this point, reserve swap fee income in CACAO will be swapped for all pool's and user's outstanding collateral in a pro-rate fashion, deducing from each position's Collateral Obligation and adding the equivalent amount to each Lender's Maya Balance of that Trade Asset. Users can then accumulate and eventually withdraw their Trade Asset by swapping it for the underlying asset for slip fees (but gas), or any other asset of their choice (with slip fee, but perhaps lower gas).

In order to do this effectively, Lender must be able to at any time declare a Maya Address as beneficiary. Sending a tx from the Owner address (the original opener of the loan) with the memo $:<Maya Address> would thus name that Maya Address as the receiver of all Trade Assets paid from Collateral Obligation of the protocol to the lender. Importantly, a lender does not need to declare a beneficiary to open or close a loan, or to close a loan after supply cap is hit. That said, only lenders with Maya addresses as beneficiaries will be paid down their Collateral Obligation, so a Lender must submit their Maya Address beneficiary before or after getting their Collateral Obligation. Doing so would change the Borrower struct from:

"owner": "0x00000000d7c185343e6504e428b8f8b5ad6c91b8","asset": "ETH.ETH","debt_issued": "975164590000","debt_repaid": "0","debt_current": "975164590000","collateral_deposited": "499557217","collateral_withdrawn": "0","collateral_current": "499557217","collateral_obligation":"0","type":"dynamic","interest":"34","last_open_height": 15038323,"last_repay_height":0

To, for example:

"owner": "0x00000000d7c185343e6504e428b8f8b5ad6c91b8","beneficiary":"maya1rajp2whq7p5zuxvcyn85l0kdkfv0c9ar6wdcmv","asset": "ETH.ETH","debt_issued": "975164590000","debt_repaid": "0","debt_current": "975164590000","collateral_deposited": "499557217","collateral_withdrawn": "0","collateral_current": "499557217","collateral_obligation":"0","type":"dynamic","interest":"34", "last_open_height": 15038323,"last_repay_height":0

Lending Popularity

If a lender does not like these conditions they are free to not lend/borrow, Maya Protocol is happy and sustainable with its swap business. Maya is providing the availability of this feature to bring users more flexibility and greater similarity to a CEX experience, that said it will not compromise its security and solvency for this feature. Thanks to Streaming Swaps pool depth is no longer as important and thanks to Liquidity Nodes having LP secure LP, there is no security scaling issue either; thus Lending is viewed as a potential income-generating feature that should be attractive but not risky.

Are the Loan Terms too disfavorable?

Interestingly, the Lending feature being less popular also makes it cheaper and less risky for those lenders/borrowers it does make sense to. Also, Maya is competing against the feature suite of CEX which has loans with interest, thus a user turning to Maya's DEX lending experience is not worse off. In any case, Maya's transparent, not risky, non-custodial, more decentralized and no-liquidation experience should be enough to attract some lenders, especially since Maya will open it up for all its pools, including stablecoin ones.

User Experience

From the design goals above:

A user deposits asset, ARB.TGT which creates a derived asset to mark their collateral amount. Eg, 2.0 TGT

Under the hood the 2.0 ARB.TGTis swapped across the pools to buy and burn ~1.99 ARB.TGT in CACAO^

Based on a fixed 2 CR (or 0.5 LTV) some amount of MOAR-denominated or CACAO-denominated debt is minted.

Enough CACAO is then counter-minted to produce this debt: 1.99 / 200% = 0.995 ARB.TGT of MOAR or CACAO^

Based on user preference, the debt can be withdrawn as any other asset (eg. USDC or ETH).

The MOAR or CACAO is then swapped to 0.985 ARB.TGT of USDC^

^slip-based fees apply.

Overall, 2.0 ARB.TGT is deposited and <1.0 ARB.TGT worth of USDC is withdrawn (slip fees), leading to a net-burn of >1.0 ARB.TGT in CACAO.

Sometime later, the user can pay back the debt, which mints enough CACAO to pay back the collateral. Note that debt has increased according to that pool's interest rate overtime, so the user must pay more debt to settle and thus less CACAO is minted.

Eg. USDC is swapped to CACAO (which is further swapped to MOAR if USD-denominated) and cancels the debt^

The debt is repaid, so the user unlocks their full collateral minus slip fees, 1.99 ARB.TGT

Enough CACAO is minted to swap to 1.99 in ARB.TGT^

^slip-based fees apply.

Overall, 1.0 ARB.TGT worth of USDC is deposited and <2.0 ARB.TGT worth of ARB.TGT is withdrawn (minus slip fees), leading to a net-mint of <1.0. ARB.TGT in CACAO.

Across the loan period, new CACAO was continuously minted from interest, and 8 * slipFees of income was made. Essentially a single loan creation is worth 8 swaps to the network, with only 1 L1 txin and txout. Half of those swaps produce revenue for pools, while the other half burns the swap fee in CACAO.

Technical Implementation

Aside from these key differences, the implementation will largely mirror Thorchain's Lending feature, including $MOAR implementation after Thorchain's $TOR implementation.

The memo for a loan open will have to include :CACAO at the end of a loan open and loan close to denote that the debt taken on from that pool should be denominated in USD or CACAO instead.

Since this implementation increases LP_unit value over time, it also directly benefits CACAO Pool providers (who bet on LP_unit value beating outstanding synths value of a pool); additionally to the other direct benefits of increased volume & activity.

When tallying Total Collateral Value and Pool Collateral Value to compute interest rates, outstanding Collateral Obligation of a pool is not added to the global and the pool's tally.

Repayment Module

The Repayment Module will be a Cosmos Module with CACAO balance to pay out Collateral Obligations every 600 blocks pro-rate to outstanding obligations of Borrwers with set Beneficiary (if it has balance to do so) in the form of swaps to Trade Assets. It is backfilled with the reserve's 5% swap fee share whenever there are outstanding Collateral Obligations. Due to this design, it is easy for Node Operators to vote an additional transfer from the reserve module to the Repayment Module, or otherwise for users to donate CACAO to it or new proposals to backfill it more quickly in the event a large amount of Collateral Obligations is accumulated that do not convert to new loans.

Mimirs

PauseLoans ability to pause opening/closing loans
PauseOpening ability to pause opening loans
PauseClosing ability to pause closing loans
LoanRepaymentMaturity = 432000 specifies how long a loan must be open before it can be closed, set to 30 days in blocks.
CR = 2 the collateralization ratio of all loans.
TopRate (0-100,000bps) the interestRate of a pool if TotalCollateralValue = TVL and a specific pool's PoolCollateralValue = PoolDepth, note that a specific pool's annual interest could be higher than TopRate.
LPinterestShare (0-10000 bps) = 5000

Note that having TopRate = 0 makes this design almost equivalent to Thorchain Lending, except for the fact that Maya Lending: 1. Has no caps, 2. Has the plan in place for controlled path back to solvency after a price fall spiral thru the conversion of short-term obligations to long-term obligations, 3. Has CACAO as valid debt denomination & 4. Has Lending open for all pools.

We hope some or all of these ideas further iterate on Thorchain Lending positively and make it back upstream in some shape or form.

Risk Analysis

`LPs and CACAO Pool`	80% of `MaxSupply`	99% of `MaxSupply`	`MaxSupply`
No open loans	`1` No risk of CACAO inflation since there aren't any loans to close. Significantly better than status quo given way lower CACAO supply having earned value to LP_Units, plus fees from loan open/closures. No income from interest on debt.	`6` No risk of CACAO inflation since there aren't any loans to close. Better than status quo given lower CACAO supply earned value to LP_Units, plus fees from loan open/closures. No income from interest on debt.	`11` No risk of inflation. At status quo. No income from interest on debt.
Some open loans	`2` Some risk of CACAO inflation if LP enters here. Significantly better than status quo given way lower CACAO supply having earned value to LP_Units, plus fees from loan open/closures. Some income from interest on debt.	`7` Risk of negligible inflation. Better than status quo given slightly lower CACAO supply earned value to LP_Units, plus fees from loan open/closures. Some income from interest on debt.	`12` No risk of inflation. At status quo plus fees from loan open/closures. Some income from interest on debt.
Many open loans	`3` More risk of CACAO inflation if LP enters here. Significantly better than status quo given way lower CACAO supply having earned value to LP_Units, plus fees from loan open/closures. More income from interest on debt. Worst risk for LPs.	`8` Risk of negligible inflation. Better than status quo given slightly lower CACAO supply earned value to LP_Units, plus fees from loan open/closures. More income from interest on debt.	`13` No risk of inflation. At status quo plus fees from loan open/closures. More income from interest on debt. Best deal for LPs.
Open loans & Collateral Obligations	`4` Less risk of CACAO inflation if LP enters here. Significantly better than status quo given way lower CACAO supply having earned value to LP_Units, plus fees from loan open/closures. Less income from interest on debt.	`9` Risk of neglibile inflation. Better than status quo given slightly lower CACAO supply earned value to LP_Units, plus fees from loan open/closures. Less income from interest on debt.	`14` No risk of inflation. At status quo plus fees from loan open/closures. Less income from interest on debt.
Collateral Obligations & No open loans	`5` No risk of CACAO inflation as there are no loans open. Significantly better than status quo given way lower CACAO supply having earned value to LP_Units, plus fees from loan open/closures. No income from interest on debt.	`10` No risk of CACAO inflation as there are no loans open.Better than status quo given slightly lower CACAO supply earned value to LP_Units, plus fees from loan open/closures. No income from interest on debt.	`15` No risk of inflation. At status quo plus fees from loan open/closures. No income from interest on debt.

`CACAO HOLDERS`	80% of `MaxSupply`	99% of `MaxSupply`	`MaxSupply`
No open loans	`1` Previous holders have experienced considerable deflation. No risk of inflation since there aren't any loans to close.	`6` Previous holders have experienced a little deflation. No risk of inflation since there aren't any loans to close.	`11` Holders have experienced no change in supply. There is no risk of inflation.
Some open loans	`2` Previous holders have experienced considerable deflation. There is risk of significant inflation from loans closing.	`7` Previous holders have experienced a little deflation. There is some risk of negligible inflation from loans closing.	`12` Holders have experienced no change in supply. There is no risk of inflation.
Many open loans	`3` Previous holders have experienced considerable deflation. There is more risk of significant inflation from loans closing. Worst risk for Holders.	`8` Previous holders have experienced a little deflation. There is more risk of negligible inflation from loans closing.	`13` Holders have experienced no change in supply. There is no risk of inflation.
Open loans & Collateral Obligations	`4` Previous holders have experienced considerable deflation. There is less risk of significant inflation from loans closing.	`9` Previous holders have experienced a little deflation. There is less risk of negligible inflation from loans closing.	`14` Holders have experienced no change in supply. There is no risk of inflation.
Collateral Obligations & No open loans	`5` Previous holders have experienced considerable deflation. There is no risk of inflation since there aren't any loans to close.	`10` Previous holders have experienced a little deflation. There is no risk of inflation since there aren't any loans to close.	`15` Holders have experienced no change in supply. There is no risk of inflation.

*`BORROWERS`*	80% of `MaxSupply` Less Risky for Borrower	99% of `MaxSupply`	`MaxSupply` Most risky for Borrower
No open loans	`1` Can open cheapest loan in a protocol with no leverage. Protocol has ample space to mint CACAO and payout collateral if loan is closed. Best deal for Borrower.	`6` Can open cheapest loan in a protocol with no leverage. Protocol has some space to payout collateral if loan is closed.	`11` Can open cheapest loan in a protocol with no leverage. Needs more loans to open to bring down CACAO supply to be certain of closing his, else the borrower might have to close the loan for a `Collateral Obligation` instead --increasing exogenous assets (1x) and decreasing outstanding debt (1x)-- and getting a long term Collateral Obligations. No CACAO is minted. Net neutral for equity.
Some open loans	`2` Can open or keep a somewhat cheap loan in a protocol with some leverage. Protocol has ample space to mint CACAO and payout collateral if loan is closed.	`7` Can open or keep a somewhat cheap loan in a protocol with some leverage. Protocol has some space to payout collateral if loan is closed.	`12` Can open or keep a somewhat cheap loan in a somewhat leveraged protocol. Needs more loans to open to bring down CACAO supply to be certain of closing his, else the borrower might have to close the loan for a `Collateral Obligation` instead [increasing exogenous assets (1x) and decreasing outstanding debt (1x)] and getting a long term Collateral Obligations. No CACAO is minted. Net neutral for equity.
Many open loans	`3` Can open or keep a loan with a significant interest. Protocol has ample space to mint CACAO and payout collateral if loan is closed.	`8` Can open or keep a loan with a significant interest. Protocol has some space to payout collateral if loan is closed.	`13` Can open a loan with a significant interest. Needs more loans to open to bring down CACAO supply to be certain of closing his, else the borrower might have to close the loan for a `Collateral Obligation` instead -[increasing exogenous assets (1x) and decreasing outstanding debt (1x)] and getting a long term Collateral Obligations. No CACAO is minted. Net neutral for equity. Worst deal for borrower.
Open loans & Collateral Obligations	`4` Can open or keep a loan with a lesser interest. Protocol has ample space to mint CACAO and payout collateral if loan is closed.	`9` Can open or keep a loan with a lesser interest. Protocol has some space to payout collateral if loan is closed.	`14` Can open a loan with a lesser interest. Needs more loans to open to bring down CACAO supply to be certain of closing his, else the borrower might have to close the loan for a `Collateral Obligation` instead [increasing exogenous assets (1x) and decreasing outstanding debt (1x)] and getting a long term Collateral Obligations. No CACAO is minted. Net neutral for equity.
Collateral Obligations & No open loans	`5` Can open a loan with negligible interest. Protocol has ample space to mint CACAO and payout collateral if loan is closed. Best deal for Borrower.	`10` Can open a loan with negligible interest. Protocol has some space to payout collateral if loan is closed.	`15` Can open a loan with negligible interest. Needs more loans to open to bring down CACAO supply to be certain of closing his, else the borrower might have to close the loan for a `Collateral Obligation` instead. [increasing exogenous assets (1x) and decreasing outstanding debt (1x)] and getting a long term Collateral Obligations. No CACAO is minted. Net neutral for equity.

*`RESERVE`*	80% of `MaxSupply`	99% of `MaxSupply`	`MaxSupply`
No open loans	`1` At status quo: being replenished by 5% of swap fees.	`6` At status quo: being replenished by 5% of swap fees.	`11` At status quo: being replenished by 5% of swap fees.
Some open loans	`2` At status quo: being replenished by 5% of swap fees.	`7` At status quo: being replenished by 5% of swap fees.	`12` At status quo: being replenished by 5% of swap fees.
Many open loans	`3` At status quo: being replenished by 5% of swap fees.	`8` At status quo: being replenished by 5% of swap fees.	`13` At status quo: being replenished by 5% of swap fees.
Open loans & Collateral Obligations	`4` Loses its replenishing cash flow: inflows are instead used to pay Trade Assets to Collateral Obligation Holders.	`9` Loses its replenishing cash flow: inflows are instead used to pay Trade Assets to Collateral Obligation Holders.	`14` Loses its replenishing cash flow: inflows are instead used to pay Trade Assets to Collateral Obligation Holders.
Collateral Obligations & No open loans	`5` Loses its replenishing cash flow: inflows are instead used to pay Trade Assets to Collateral Obligation Holders.	`10` Loses its replenishing cash flow: inflows are instead used to pay Trade Assets to Collateral Obligation Holders.	`15` Loses its replenishing cash flow: inflows are instead used to pay Trade Assets to Collateral Obligation Holders.

*`PROTOCOL HEALTH`*	80% of MaxSupply	99% of MaxSupply	MaxSupply
No open loans	`1` Swaps operating optimally. Has 20M CACAO of equity. Cannot lose equity since there aren't any open loans.	`6` Swaps operating optimally. Has little equity. Can earn or lose equity.	`11` Swaps operating optimally. Can earn equity (new loan opens from exogenous assets) or stay equity neutral (no one does anything).
Some open loans	`2` Swaps operating optimally. Has 20M CACAO of equity.	`7` Swaps operating optimally. Has little equity. Can earn or lose equity.	`12` Swaps operating optimally. Can earn equity (new loan opens from exogenous assets and burnt interest income) or stay equity neutral (Borrowers close loan to `Collateral Obligation`).
Many open loans	`3` Swaps operating optimally. Has 20M CACAO of equity. Can earn equity. Can lose equity from loan closures.	`8` Swaps operating optimally. Has little equity. Can earn or lose equity.	`13` Swaps operating optimally. Can earn equity (new loan opens from exogenous assets and burnt interest income) or stay equity neutral (Borrowers close loan to `Collateral Obligation`).
Open loans & Collateral Obligations	`4` Swaps operating optimally. Has 20M CACAO of equity. Can lose equity from loan closures.	`9` Operating optimally. Has little equity. Can earn or lose equity. A `Collateral Obligation` refinancing can need or provide equity, depending on the asset ratios of the old loan and the new loan.	`14` Swaps operating optimally. Can earn equity (new loan opens from exogenous assets, burnt interest income) or stay equity neutral (Borrowers close loan to `Collateral Obligation`).
Collateral Obligations & No open loans	`5` Operating optimally. Has 20M CACAO of equity. Cannot lose equity since there aren't any open loans.	`10` Operating optimally. Has little equity. Can earn or lose equity. A `Collateral Obligation` refinancing can need or provide equity, depending on the asset ratios of the old loan and the new loan.	`15` Swaps operating optimally. Can earn equity (new loan opens from exogenous assets) or stay equity neutral (Borrowers close loan to `Collateral Obligation`)

*`Collateral Obligation Holders`*	80% of `MaxSupply`	99% of `MaxSupply`	100% of `MaxSupply`
No open loans	`1` N/A	`6` N/A	`11` N/A
Some open loans	`2` N/A	`7` N/A	`12` N/A
Many open loans	`3` N/A	`8` N/A	`13` N/A
Open loans & Collateral Obligations	`4` Using Collateral Obligation to refinance a new loan, waiting for term maturity and then closing to get back collateral in full has little risk the lower the supply. Best deal for Collateral Obligation holders.	`9` Can only slowly earn `Trade Assets` from 5% of swap fee from Reserve or take some risk refinancing a new loan hoping there is equity to close it later for good (after the loan maturity).	`14` Can only slowly earn `Trade Assets` from 5% of swap fee from Reserve. Cannot refinance `Collateral Obligation` given that it will need CACAO minting.
Collateral Obligations & No open loans	`5` Using Collateral Obligation to refinance a new loan, waiting for term maturity and then closing to get back collateral in full has little risk the lower the supply.	`10` Can only slowly earn `Trade Assets` from 5% of swap fee from Reserve or take some risk refinancing a new loan hoping there is equity to close it later for good (after the loan maturity).	`15` Can only slowly earn `Trade Assets` from 5% of swap fee from Reserve. Cannot refinance `Collateral Obligation` given that it will need CACAO minting. Worst deal for Collateral Obligation holders.

*Note that refinancing Collateral Obligation always mints some CACAO to pay out the chosen debt output, so it cannot be done at cap. There can be a net liquidity/cash inflow or outflow from loan close to refinancing, depending on the changing ratios of collateral-debt at loan open, loan close for Collateral Obligation and refinancing of Collateral Obligation.

Conclusions

The Protocol and LPs are always as well off or better with Lending, even if they take the roundrip of lower supply and back to max supply. The only thing the reserve stands to lose is it's 5% of swap fee revenue. The higher the CACAO supply, the less risky it is for LPs and Holders, as the only way to go at the top is to lower CACAO Supply which will always mean supercharged earnings for LPs thru LP_Unit value growth.

The best time to open a loan for borrowers is when either interests are low or when equity is high (to have room for loan closures). The only player holding any significant risk from the system is borrowers. Best course of action for them is not to bank run but to wait for equity to accumulate to safely exit. If they panic and redeem a Collateral Obligation they actually influx liquidity to the system short term. If they regret panicking, they can refinance their Collateral Obligation.

During this whole process and in any scenario, LPs accumulate fees from loan penings, loan closings, volatility, price arbing between pools having loans open/close, and most significantly: interest income on outstanding debt. All in all we believe this is a solid proposal for revenue diversification presenting negligible risk for incumbent players in the Maya ecosystem. More features and possibilities will always attract new users, use cases and user interfaces, bringing more activity to the Maya economy.

Edited Jun 20, 2024 by Aaluxx Myth