This post will cover more specifics on the lending protocol mechanics and how interest will work, collateralization limits, and liquidations.
Cryptopunk holders will deposit their punks as collateral into a vault and be able to mint PUSd. The DAO will initially seed liquidity for PUSd among a basket of other tokens in order to peg its value as close to $1 as possible at all times. Additionally, incentives will be offered to liquidity providers to add liquidity to this pool. This enables PUSd holders to easily exchange the token either to buy other cryptocurrencies or earn yield in DeFi in other ways.
We recognize that not all Cryptopunk or NFT owners have savant level understanding of DeFi and yield-farming; therefore, we will partner with other protocols in DeFi that are experts in yield-farming and will make earning yield as easy as possible. The full details of this arrangement will be shared in a future post.
Interest at launch will be 2%, which we feel is among the lowest in the market and extremely competitive, along with a 0.5% withdrawal fee. Interest will be constantly accruing and in order for a punk holder to withdraw his or her collateral the full debt plus any outstanding accrued interest will need to be paid back. We still feel confident that at a 2% interest rate is still very attractive for depositors as they can earn double digit returns in DeFi. Interest rates will be dynamically adjusted to ensure they always stay extremely competitive within the market. All debt positions will allow 32% of the collateral value to be drawn and liquidation will occur if the debt/equity ratio is 33% or higher.
Aliens will be valued at 4,000 ETH, Apes at 2,000 ETH, and all other punks will be valued at the punk floor. We recognize that the above figures (aliens and apes) do not necessarily represent the fair-market-value these NFTs would receive in the market, but they are the maximum amount of collateral we are willing to extend to them at launch. These figures are important because it determines how much credit they are able to obtain. In order to mitigate risk, we have capped the collateral values at these levels at launch; however, governance can change these values at a later date. The initial Cryptopunk vault will be capped at $10m as we conservatively scale up the TVL. This limit will also gradually be increased by governance over time. Governance holders can change these limits at their discretion with a valid, binding governance proposal.
Chainlink is building us a custom price oracle that will feed the smart contract vault the floor price in ETH. We are working closely with the Chainlink team and we believe this oracle will set the ground for an on-chain oracle for the punk floor. We will share more specifics of this oracle in another post.
We recognize that “all other punks” is a broad term, and not all punks are floor punks. For instance, a Tiara is commonly agreed within the Cryptopunk community to much more valuable than a floor punk. In order to increase their credit limit the borrower needs to lock JPEG into a smart contract for 1 year. This amount will be unlocked after 1 year. The amount that needs to be locked depends on the maximum loan he is willing to draw. For example, if a user and Governance both agree a Tiara is worth $1m, the user will have to lock up $82,500 worth of JPEG for 1 year. [$1m (collateral value) *33% (max loan amount) * 25% = $82,500. We believe this puts fundamental value on the governance token, scaling it’s value with the Cryptopunk market, while also creating a supply sink for JPEG. They also need to make a proposal on the governance forum to request a debt limit. Governance will determine if the increase is appropriate or not. Frivolous requests will be denied so please don’t even waste your time.
If a punk exceeds or equals a 33% debt/equity ratio it will be flagged for liquidation. Only the DAO can conduct liquidations. The DAO may choose to either hold the punk, sell it on a secondary market or OTC. We are also creating a novel insurance mechanism. Users can elect to purchase insurance for non-refundable 1% fee on the loan they draw. If they are liquidated they can repurchase their punk back from the DAO after repaying debt, accrued interest, and a 25% liquidation penalty. The DAO underwrites all debt and ensures that all outstanding debt plus accrued interest can be repaid by the DAO at all times.
A glimpse into the Citadel…