Understanding Equilibrium in one article

on March 20, Equilibrium announced that it has won the 12th auction of Polkadot and will join the Polkadot network as the 12th parachain. The project plans to launch spot and lending markets by June.

Equilibrium is a decentralized cross-chain money market protocol. Users can:

Lending: Lending an asset and earning interest

Relief: Provide liquidity to cover potential borrower losses and earn profits from them

Borrowing: borrowing assets for trading, leverage, hedging, etc. using collateral and paying interest

Trading: Swap Crypto Assets and Trade on Margin

Equilibrium will be a Polkadot parachain hosting the multipurpose money market protocol, allowing users to lend and borrow stablecoins and crypto assets, protect system debt and earn fees in return.

The design of the Equilibrium protocol allows for the creation of a leveraged, interoperable decentralized exchange.

Equilibrium uses novel methods for on-chain pricing (interest rate calculation) and risk calculation (determining overall system health), which differentiate Equilibrium from other well-known DeFi projects in the following ways:

There is no arbitrary governance setting interest rates, they are determined by the borrower’s portfolio, borrower debt, overall system liquidity, and market risk and dynamics.

There are no arbitrarily set LTV requirements. The system ensures that every position remains solvent with a 100% collateralization ratio.

There are no arbitrarily set liquidation penalties and no hidden fees when borrowers default on their loans.

By design, the system always has two sides: lenders and principals are liquidity providers on one side, and borrowers are on the other side, paying lenders and principals.

Equilibrium Asset Module supports:

asset loan;

Fractional Reserve Funding and Synthetic Asset Creation;

Exchanges that allow users to trade with leverage;

Portfolio Hedging.

The Assets module logic allows Equilibrium to introduce a wide range of DeFi products into a blockchain. The Polkadot consensus and finalization mechanism ensures the security of Equilibrium’s bottom layer at the blockchain level. Around 20 validators govern the Equilibrium parachain through NPoS consensus and GRANDPA finality.

Equilibrium achieves cross-chain compatibility through the way Polkadot integrates third-party bridges into different blockchains. Currently working closely with several prominent Polkadot bridges connecting ETH and BTC blockchains to connect liquidity to Equilibrium.

Liquidity and Deposits

Before any application is actually available to Equilibrium users, there must be some liquidity within the parachain. There are two ways to obtain liquidity in Equilibrium:

Users who own EQ tokens can claim these tokens and use them as collateral or provide liquidity.

Users who want to become borrowers/lenders/bailers in the Equilibrium ecosystem can bring other cryptoassets into parachains through different Polkadot bridges.

bridge

A bridge is a secure communication protocol between two different blockchains: Bitcoin, Ethereum, EOS, Cosmos, Tezos, etc. are all compatible with Polkadot and Equilibrium. As an independent bottom layer, Equilibrium integrates ChainBridge as a means of communicating with Ethereum and ETH-like blockchains. With the Chainbridge module, users will be able to deposit assets from Ethereum, BSC, HECO, Polygon networks into Equilibrium, and bridge EQ tokens from Equilibrium into all these blockchains.

When Equilibrium becomes a Polkadot parachain, Polkadot itself will have a cross-chain messaging protocol and unified assets. Equilibrium is closely monitoring these developments and will integrate all available bridges and assets.

loan

Users borrow assets in Equilibrium with collateral. Without a debt “position” for each asset, Equilibrium treats assets and liabilities as a complete portfolio. If the asset value exceeds the liability value, the borrower is safe from liquidation. If liquidated, all assets and liabilities are transferred to the bail pool. The interest paid depends on the portfolio collateral level.

EQ tokens need to pay interest, when your EQ token balance is insufficient, the system will automatically sell your collateral to cover the interest charges, so make sure you always have enough EQ liquidity to avoid unnecessary exchanges.

loan

Users can lend out assets in Equilibrium and earn interest. By lending assets through Equilibrium, the lender transfers the risk of liquidation to the principal. When a borrower defaults, the lender withdraws its assets from the principal pool, and the principal gets liquidated collateral in return.

get out of trouble

Bailers can provide liquidity to cover the liquidation of borrowers. When borrowers default on their loans, their collateral and debt are prorated to bail officers. The only way a bail officer can get a negative balance (debt) is through a borrower liquidation.

Bailers are the guardians of the system. They ensure that the system remains solvent at all times and are rewarded with interest for taking on liquidation risk. 80% of the interest rate the system collects from borrowers goes to bail officers. The other 20% is accumulated in the treasury and used as a third line of defense in case bail officers themselves run out of funds.

Margin Trading

Equilibrium’s interoperable DeFi platform allows leveraged trading with up to 100% margin.

high leverage

Equilibrium’s approach to modeling mortgage lending allows for low levels of collateralization on user portfolios. This means that high leverage is achievable, possibly 20x or more.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/understanding-equilibrium-in-one-article/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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