How Interest Free Borrowing Works on HLiquity

Decentralized finance (DeFi) continues to reshape the financial landscape, and HLiquity, a fork of the Liquity protocol built on the Hedera network, presents a compelling innovation with interest free borrowing opportunities. This model challenges traditional lending practices by allowing users to secure loans without the burden of recurring interest payments.

Let’s understand the core workings of HLiquity’s interest free borrowing mechanism.

The Fundamentals of Interest Free Borrowing

1. Collateralization with HBAR:
   To obtain a loan on HLiquity, users must deposit HBAR, Hedera’s native cryptocurrency, as collateral. The minimum collateral ratio is set at 110%, signifying that the value of the HBAR collateral must exceed the value of the borrowed amount by at least 10%.
   
2. Loans in HCHF:
   Loans on HLiquity are disbursed in HCHF, a stablecoin pegged to the Swiss Franc (CHF). The Swiss Franc is renowned for its stability, making HCHF a reliable store of value relative to other volatile cryptocurrencies.
   
3. The Stability Pool: Security Mechanism
   HLiquity incorporates a Stability Pool that holds HCHF deposits. This pool acts as a crucial buffer, maintaining the protocol’s solvency and safeguarding against loan defaults. If a borrower’s collateral ratio falls below the 110% threshold, their HBAR collateral can be liquidated to repay the loan and replenish the Stability Pool.
   
4. Collective Responsibility: Borrowers as Guarantors
   Borrowers on HLiquity act as guarantors of last resort. In extreme cases where the Stability Pool is insufficient to cover liquidated positions, the debt is distributed proportionally across open loans. This shared responsibility model reinforces systemic stability.
   
5. Non-Custodial and Governance-Free
   HLiquity operates autonomously with a focus on decentralization. Users remain in full control of their funds, and the protocol’s parameters are not subject to centralized manipulation.
   

The Absence of Interest: Key Differences from Traditional Lending

HLiquity’s model diverges significantly from traditional lenders who largely rely on recurring interest payments. Here’s how it achieves interest free borrowing:

• One-Time Borrowing Fee: HLiquity charges a one-time borrowing fee, calculated as a percentage of the loan amount. This fee covers the cost of facilitating the loan on the protocol. The fee range is 0.5% to 5%, depending on the amount of liquidity borrowed.
  
• Liquidations and Stability: Liquidations are an integral part of maintaining the HLiquity system’s health. When a borrower’s collateral ratio falls near the 110% minimum threshold, the HBAR collateral is liquidated. The proceeds repay the loan and replenish the Stability Pool, while the liquidator earns a bonus.
  
• Prioritizing Peg Stability: HLiquity’s emphasis lies in upholding the peg of HCHF to the Swiss Franc. This focus on a stable currency underpins the viability of its interest-free lending model.

Benefits of a Zero-Interest Model

• Reduced Cost of Borrowing: Without ongoing interest accumulation, HLiquity users enjoy significantly lower overall borrowing costs.
  
• Predictable Costs: The upfront borrowing fee ensures transparency, empowering borrowers to make well-informed financial decisions.
  
• Flexibility: Borrowers have the liberty to repay loans without the pressure of strict repayment schedules.
  
• Unlocking Liquidity: HLiquity lets users access the liquidity in their HBAR holdings without outright selling the asset.

Important Considerations

• Volatility Risk: As with all cryptocurrencies, HBAR prices can fluctuate. Borrowers need to be aware of the risk that price drops could trigger liquidations.
  
• Active Monitoring: It’s crucial for borrowers to vigilantly monitor their collateral ratios to prevent liquidations.
  
• Opportunity Cost: Utilizing HBAR as collateral means potentially forgoing gains if its price increases substantially.
  
  

HLiquity offers a revolutionary lending model within the DeFi landscape, allowing users to borrow without traditional interest burdens. Its reliance on collateral, stability pools, and a decentralized approach promotes financial inclusivity and flexibility. As with any investment opportunity, thorough risk assessment and an in-depth understanding of the protocol are prerequisites before engaging with HLiquity.

Linkedin | Twitter | Telegram | Documentation