Ethos Reserve - interest-free loans on Ethereum

Ethos Reserve

If you have BTC or ETH that doesn’t generate return, you can consider posting these digital assets as collateral and take interest-free loans which then can be put to good use. Ethos Reserve is a decentralized lending protocol allowing to borrow no-interest loan against BTC and ETH. The minimum collateral ratio is 108% and 120% for ETH and BTC at the time of writing. Loans in the protocol are paid in Ethos Reserve Notes (ERN), a stablecoin pegged to US dollar. ERNs can be exchanged for collateral on a 1:1 basis. They can also be put into Stability pools to earn yield. Not only ERN but also collateral doesn’t sit idly in Ethos Reserve vaults but instead is used to generate passive yield which is distributed to Stability Pool depositors.

As already mentioned, ERN tokens can always be redeemed for an equivalent amount of collateral. You may swap your tokens for BTC or ETH regardless of you are a borrower or not. When a user wants to swap his stable assets for the same amount of collateral, that amount is withdrawn from the least collateralized positions. ERN tokens can also be used to repay part or all of the debt. In this case the debt amount decreases, and the collateral ratio improves.

Liquidation

When a position’s collateral ratio falls below the minimum required ratio, it becomes an undercollateralized position and as such can be liquidated by any user. If the Stability Pool is big enough to cover the whole debt amount, the debt is offset with the Pool and collateral is distributed to depositors.

An example will make it clearer. Let’s say the Stability Pool contains 10,000,000 (10 M) ERN, while your position is worth 1M ERN. A position with 100 ETH and 160,000 ERN is liquidated when ETH price is $1,700. So, with the debt amount at 160,000 ERN and collateral at 170,000 the collateral ratio becomes 106.25% which is below the minimum required ratio of 108% for ETH-backed positions. Since your share in the pool is 10%, your position will depreciate in the amount equivalent to 10% of the liquidated debt. Now you’ll have 984,000 ERN (1,000,000 – 16,000). But you’ll also get 10% off the liquidated collateral. So, you’ll receive $17,000 and lose $16,000. Your net gain is $1,000.

If the Stability cannot cover the liquidated debt amount, the debt and the collateral are distributed to other existing, i.e., the addresses with healthy collateral ratios.