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Borrowing and lending

Fixed rate markets
Each time the protocol opens an expirable position for a user, borrowing and lending at a fixed rate occur on other DeFi protocols. At a high level:
lending at a fixed rate is equivalent to buying a discounted zero-coupon bond
borrowing at a fixed rate is equivalent to selling a discounted zero-coupon bond.
The maturity of the expirable needs to match the maturity of the zero-coupon bonds.
Contango uses different protocols to borrow and lend at a fixed rate. In this section, you would find more information about our integration with:
​Yield​
​Notional 
Flash swaps
Contango uses the concept of flash swaps to make the protocol capital efficient. Let's say a trader wants to buy 1 ETH with 100 DAI. Without using flash swaps the trader would need to first give DAI before receiving ETH. With flash swaps the trader could get 1 ETH first as long as the 100 DAI are given back in the same block. If that's not the case the transaction is reversed. This allows the trader, or a protocol such as Contango, to perform some actions between receiving the 1 ETH, at the start of the transaction, and giving 100 DAI at the end of the transaction.
Position opening
Let's start by taking the example in the position opening section, where a trader buys 1 expirable at 100.59 DAI100.59 \: DAI100.59DAI
with SL=100.10 DAIS_{L}=100.10 \: DAISL​=100.10DAI
. The protocol owes a debt D=50.59 DAID=50.59 \: DAID=50.59DAI
. Let's say the borrowing requires a minimum collaterization ratio (CR) of 140% margin, i.e. the equivalent of 50.59∗140%=70.83 DAI50.59*140\%=70.83 \:DAI50.59∗140%=70.83DAI
. The trader has only posted 50 DAI50 \: DAI50DAI
as margin, i.e. CRborrow=50/50.59=98.83%CR_{borrow}={50}/{50.59}=98.83 \% CRborrow​=50/50.59=98.83%
, there is clearly not enough money to do the borrowing with over-collaterisation.
Using flash swaps on the spot market, e.g. on Uniswap, the protocol is now able to meet the collaterisation ratio requirement by:
1.first getting the ETHETHETH
 to be lent
2.lending ETHETHETH
 by buying its zero-coupon version zcETHzcETHzcETH
, worth 0.9929∗99.90=99.19 DAI0.9929 *99.90 = 99.19 \:DAI0.9929∗99.90=99.19DAI
 
3.using this zero-coupon as margin to borrow the required fund. The collaterisation ratio for borrowing would be CRborrow=99.19/50.59=196.07%CR_{borrow}={99.19}/{50.59}=196.07 \% CRborrow​=99.19/50.59=196.07%
 which is above the required 140%.
4.Swap the borrowed zcDAIzcDAIzcDAI
 for DAIDAIDAI
. 
5.use the borrowed DAIDAIDAI
 plus margin to pay for the initial 0.9929 ETH0.9929 \: ETH0.9929ETH
.
Flashswap steps to open a long position
Position closing
Contango closes a position by reverting the above steps. In the long example in the position closing section, the protocol follows these steps:​
1.  0.9924 ETH0.9924 \:ETH0.9924ETH
 is repaid back from lending and swapped for 99.14 DAI99.14 \:DAI99.14DAI
.
2.​DAIDAIDAI
 is exchanged for its zero-coupon bond version, zcDAIzcDAIzcDAI
.
3.​zcDAIzcDAIzcDAI
 is then used to reimburse the debt and retrieve zcETHzcETHzcETH
 which is worth 49.41 DAI49.41 \:DAI49.41DAI
.
4.The margin is swapped for ETHETHETH
.
5.​ETHETHETH
 is given back to close the flashswap.
Flashswap steps to close a long position
Price improvement
Yield protocol
Last modified 3mo ago