There is a Liquidity Providers’ Pool (LPP) instance per denomination that serves all borrow requests and repayments in that same denomination. LPP calculates the total principal and interest due and keeps details of the opened loans. Each LPP instance calculates a fixed interest rate on a borrow request and a total liability amount. LPPs do not deal with currencies other than the LPP native one, LPN.

All lease positions are created by the Leaser contract, which acts as a smart contract factory. One Leaser is connected to one LPP and, therefore, to one stablecoin currency, the liquidity pool’s native currency, LPN. If a user wants to borrow USDC, they need to make a request to the Leaser contract that is connected to the LPP with USDC as an LPN

The Leaser smart contract is configured with the following parameters:

A mathematical representation of “liability covered”:

Opening a new Lease is made via the Leaser by providing only the down payment. The maximum amount to be borrowed is based on the down payment and the allowed maximum initial liability percentage (e.g. 60%)

1. The user opens a lease through the Leaser by providing a down payment. The options for that are as follows:

2. The Leaser smart contract creates a Lease instance for every opened lease. Only the Leaser is allowed to create such instances, which is verified on contract creation

User → the address of the user requesting a loan
​Currency → the currency of the loan, LPN
​Current period → initially, this will be the first period, starting at the moment of loan creation and ending with the first interest due date

ℹ️ The above data points are configured in Leaser and shouldn't change during the loan lifetime, but some could be reconfigured in Leaser.

Lease calculates the maximum amount that can be borrowed based on the provided down payment and the initial liability:

Borrow → the amount that the system will lend to the user in LPN
​Initial liability → the initial liability of the lease set in Leaser's configuration, in percentage
​Down payment → the provided down payment in LPN

ℹ️ The sum of the borrowed amount (loan) and the down payment equals the amount of the lease

3. The newly created Lease requests a loan from the LPP. The LPP first verifies that the calling address is, in fact of, a Lease contract.

First, the loan's interest rate is calculated based on the LPP's current utilization and the quoted amount to open a loan:

Utilization shows what part of the liquidity pool is in use, meaning how much of the funds there have been borrowed, including the interest.

An example quoted interest rate with 60% utilization with a base interest rate of 8%, an add-on optimal loan interest rate of 2% and an optimal utilization level of 70% can be calculated the following way:

ℹ️ A protocol interest rate of 4% (currently defined and subject to governance) would be added on top, so the effective fixed interest rate for a given position given the values from the example above would be:

Afterward, the requested borrow amount is sent to the Lease address. The amount will stay there until the lease is fully repaid and closed.

The LPP stores the following data about the loan:

A simplified step-by-step process for opening a lease position can be seen in the diagram below.

4. Once the loan is in the Lease contract, an Interchain Account (ICA) on a host network (e.g. Osmosis) can be opened. The Interchain Account acts as a normal account on the host chain (e.g. can stake, send, vote), however, it doesn’t require signatures using private keys for transactions, rather the actions are controlled via IBC by the owner account from the controller network - in our case, this is the Nolus chain. Opening such an account respectively requires an IBC acknowledgment (ACK) that the message is received. Should there be an issue with registering the account, a timeout is automatically triggered where the protocol waits for the next block before retrying the operation. Subsequently, a transfer out is initiated where the assets in the Lease contract (both the down payment and the loan) get transferred out via the existing established connection between the two chains. This action also needs acknowledgment in order to move to the next step which is to buy the asset of choice. When the asset is obtained, the Lease gets opened.

ℹ️ Generally, any action that involves the Nolus chain can be retried simply via a timeout, whereas for actions that are happening on a remote chain via ICA, there needs to be a step where the Interchain Account is restored, should a certain action fail to complete. In the example above, if there is a problem with purchasing a desired asset on the host network (e.g. due to relayer liveness issues) after the timeout is triggered, the Interchain Account needs to be recovered. This is because ICA channels are ordered (channel closes when a packet in the sequence times out) and not unordered like normal IBC channels.

1. The DeFi Lease position is now active. From here on there are two main actions that can take place - either repay the owed interest and principal or liquidate the position.

Should the user choose to repay, the asset which is used for repayment is compared to the LPN provided as a loan. If it is the same (assume USDC is owed and a user tries to repay again with USDC), the owed amount gets reduced immediately. If it is a different asset (e.g. ATOM), a transfer out is initiated via ICA, the asset gets swapped to the representation of the owed LPN (USDC) on the host network after which it gets transferred back to the Nolus network. After each of these actions has been acknowledged, a check is performed to see whether the loan has been repaid. If it hasn’t been, then the DeFi Lease position is still active.

An active DeFi Lease position can be liquidated as well. This can happen partially or entirely. In both cases, the asset gets swapped to the representation of the owed LPN on the host network after which that LPN gets bridged back via IBC to Nolus, respectively requiring acknowledgments for each of the actions. If the position is partially liquidated, it is still active. 2. If the position has been either fully liquidated or the owed amount (accumulated interest plus the principal) has been repaid in full by the user, then the status changes from “Opened” to “Paid”. When that happens, the user can close the position by transferring the assets in the Lease to their wallet. If this action gets acknowledged, the status of the Lease position changes to “Closed”.

2. If the position has been either fully liquidated or the owed amount (accumulated interest plus the principal) has been repaid in full by the user, then the status changes from “Opened” to “Paid”. When that happens, the user can close the position by transferring the assets in the Lease to their wallet. If this action gets acknowledged, the status of the Lease position changes to “Closed”

The diagram below depicts a more detailed overview of each of the states of a Lease

The status of every Lease could be queried at any time. Possible statuses are:

Open → Lease is open, there are outstanding interest and/or principal payments to be made. At this point, liquidations could happen. The user should call Repay to make partial or full debt repayment
​Paid → Lease is fully paid, there is no outstanding interest or principal debt, but the leased amount has not been withdrawn by the user yet and is still in the contract - Close should be executed by the user

Closed → The lease is fully paid, and the user has withdrawn the leased assets

The user could make a query to the Leaser to get possible lease parameters based on a down payment. Note that even if the user opens a lease with the same down payment immediately after the query, the parameters could differ due to a change in the utilization of the LPP, which would affect the interest rate

The quote returns:

total → the total amount of the lease = down payment + borrowed

borrowed → the amount that the system will lend to the user

interest rate → it is comprised of the loan interest rate (paid towards the lenders) and the margin/protocol interest (used towards buybacks)

Repayment Flow:

1. The user initiates a repayment by calling the Repay function of the Lease contract. The payment is made in LPN for the time being
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​ 2. The Lease contract gets the current principal due and the total loan interest due of the LPP loan from the LPP smart contract:

principal due → the whole principal amount

total loan interest due → the outstanding loan interest up until the current moment

Two variables are also stored → change and loan payment:

change → what is left of the payment after every step of the repayment process
​loan payment → the amount that will be sent to the LPP contract at the end to cover interest and principal / repay the loan

3. There is a defined window during which a borrower needs to pay their owed interest. A current period defining the most recent period, for which the margin interest is not yet covered, is also taken into consideration. If the leaser pays their outstanding interest, comprised of margin and loan, a new period starts. If they do not pay or fail to cover the whole amount, the period will stay the same until a new payment is made or liquidation occurs
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​4. The lease determines what part of the margin interest due could be covered with payment and updates change. If payment >= margin interest due, the margin interest will be covered, otherwise only a part of it
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​5. If there is enough change after the margin interest due has been paid, the Lease contract queries the outstanding loan interest
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​6. Lease determines what part of the outstanding loan interest could be covered with change and updates change and loan payment. If the interest overdue for the last period has been covered, the new one starts
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​7. The Lease contract calculates the margin interest due for the current period up to the present moment
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​8. The lease determines what part of the margin interest due could be covered with the remaining funds, updates change, and the current period. If change >= margin interest due, the whole interest will be covered, otherwise only a part of it
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​9. If the change is enough, the loan interest due is also covered. At this point, the interests are paid for both the previous and the current periods. The remaining amount, if any, is used to cover the outstanding principal
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​10. If there is any amount left after the covered interests and principal, it is returned to the user. Finally, the Loan instance is deleted from the LPP storage, and the user is able to withdraw the Lease amount to their wallet

If the borrower has open liabilities that do not meet the desired conditions set within the protocol, the system needs to sell (partially or fully) the borrower’s collateral so that it remains solvent. These conditions are defined in two invariants:
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​1. Interest covered

If the borrower has an outstanding margin or loan interest left after the defined interest payment period has passed, the invariant is broken, and the repayment algorithm is conducted using the leased amount
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​2. Liability covered

If the current liability of the position is greater than or equal to the max liability, then the invariant is broken, and a market price alarm notification message is sent. Given that the healthy liability is less than the max liability of the Lease, the liquidation amount is either the lease amount itself or the amount that is enough to guarantee a healthy position after the liquidation event has occurred. This liquidation amount is then swapped to LPN and is used as an input to the repayment algorithm. If an excess amount is returned, it is transferred to the Profit contract
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ℹ️ If the lease is fully liquidated, then it is closed.