Overview

Technical architecture diagram

Supplying tokens

The Slender lending protocol uses a pool-based strategy that aggregates each user's supplied assets. The lending protocol will initially support three markets: XRP, XLM, and USDC. Users will be able to provide these assets to the protocol and earn interest.

Balances in each market accrue interest based on the supply interest rate unique to that market. The supply interest rate depends on the utilization of the market and generally follows a hyperbolic curve approaching some prohibitively high value when utilization approaches 100%. Each market remains liquid as long as the total supplied amount is not being borrowed (or in other words, the utilization is below 100%).

When users supply liquidity they get LP tokens or as we call them sTokens in return. sTokens accrue interest and reflect this accrual in their “price”. All else being equal, newcomers receive fewer LP tokens for the same amount of underlying, compared to people who joined the market earlier.

Borrowing tokens

Slender enables users to borrow from the protocol with over-collateralized loans. Each borrowing market has a floating interest rate, determined by the utilization of that market's assets. In order to borrow an asset, users must deposit or approve an asset or assets as collateral that is/are valued more than the outstanding borrowed amount.

The borrowing limit depends on the Loan to Value ratio of that specific market. In order to increase the borrowing limit, users can either repay a borrowed asset (effectively reducing their debt) or deposit more collateral.

Loan to Value ratios are carefully derived and periodically reassessed using historical assets’ Value at Risk (VAR) and Expected Shortfall (ES) using Monte Carlo simulations. Asset immediate liquidity on available DEXes is also taken into account. To make simulations more robust, asset price action is considered to have periodic price jumps intervened with geometric Brownian motion (so-called Jump-Diffusion Processes).

Interest rate model

The general equation of the interest rate curve takes the following form:

$$ IR = \frac{IR_0}{(1 - U)^{\alpha}} $$

This is the interest rate payable by borrowers. Given some initial ideas about money market expectations, we can derive all the coefficients.

1. We want the initial interest rate to start at 2% APR
2. We want the interest rate at 80% utilization to be 20% APR
3. We want a maximum interest rate not to exceed 500% APR
4. We want the interest rate to rise with the increasing rate the higher the utilization.

Given all of the above, the final Equation takes the form:

$$ r = min \left[ 5, \frac{0.02}{(1 - U)^{1.43}} \right] $$