Flux Protocol
This section of the whitepaper describes the mathematics behind the platform
Flux is a complete decentralized lending protocol, and anyone can adapt and developed a variety of lending applications based on this protocol.
Assets and Cryptocurrencies
Flux Protocol supports various digital assets. Besides supporting Conflux Network’s native token - CFX, the protocol supports assets following the ERC-777 standard.
Supplying Assets
Flux Protocol aggregates the assets of all users forming an aggregated digital asset market - money market. Similar to the Compound protocol, once a user supplies the protocol with their assets, these assets become fungible. Liquidity providers (Lenders) can withdraw their supplied assets at any given time and do not need to wait for their specific loan to mature.
The asset balance of money market accrues interest based on the specific supply rate of the asset. Users are free to view their balance at any time (accrued interest - interest receivable and interest payable); when users update their balances through a transaction (supply, transfer or withdrawal of assets) the accrued interest is transferred to the user.
Individual users that hold their assets as a long-term investment (#HODL), such as CFX or other available digital assets, can supply these assets to the money market as an additional source of return of their investment. For example, users owning CFX can supply their tokens to the money market on Flux Protocol, and earn interest (denominated in CFX) without having to manage their assets, fulfill loan requests or take speculative risks.
Borrowing Assets
Flux allows users to borrow assets by depositing a trusted collateral. Users have all rights of the borrowed assets, and can freely use these assets anywhere they can be used. Users don’t need to negotiate maturity dates, interest rates, etc. User only need to specify the asset they want to borrow. In addition, if the assets are cross-chain assets, they can be cross-chained into other blockchain protocols, such as Ethereum or Bitcoin, through ShuttleFlow - A Cross-Chain Asset Protocol on the Conflux Network
Similar to the types of asset supply, every money market has a floating interest rate, determined by the market forces, which sets the borrowing cost of each asset (Borrowing Interest Rate).
In order to mitigate market risks, Flux sets the collateral factor of various asset types according to their Asset Risk Level, as displayed in Table 1. Assets cannot be over-collateralized. By combining asset price, balance, and collateral factor, the borrowing capacity is dynamically calculated for each account; each account can only borrow assets within its borrowing capacity. Collateral cannot be withdrawn, as long as the borrow is ongoing; however, even if user assets are used as collateral, the users will receive deposit interest.
At the same time, an account’s borrowing capacity cannot exceed the balance value of that specific account, which is called the collateral rate. The collateral rate is determined by the users ration between asset supply (lending) and asset borrow. When the user’s collateral rate drops below a certain threshold, the liquidation collateral rate, liquidation occurs; in order to increase the collateral rate to avoid liquidation, users can repay their borrowed assets partially or completely, and/or supply more assets into the money market.
Asset Risk Level | Collateral Factor | Assets |
Stable Coin | 130% | USDT, USDC, DAI, etc. Tokens with high market caps, high amounts of tokens distribution with exceptional market acceptance, trading depth & volume Market Cap > $50mn |
Low Risk | 140% | BTC, ETH and OKB, HT, BNB platform tokens |
Medium Risk | 150% | XRP, BCH, BSV, LTC, EOS, AD, etc. Tokens with Top 10 Market Caps |
High Risk | 160% | Tokens other than listed above |
Table 1- Collateral Factor of Asset Types
Risk & Liquidation
To reduce Flux Protocol’s risks and protect the liquidity suppliers (lenders), when the collateral rate of an account becomes negative, the account’s supplied (lending) assets will be liquidated by other users of the protocol in order to repay the borrowing outstanding to maintain the protocols requirement of over-collateralization. When the liquidation process occurs, the liquidation account’s collateral becomes an exchangeable asset at the current market price. Anybody (liquidator) can repay the borrowing outstanding of the borrower account in exchange for the borrow account’s collateral as liquidation reward.
Flux protocol expresses the collateral need as liquidation collateral rate, which is a fixed value and currently set at 110%. When an account’s borrow collateral rate is lower than the liquidation collateral rate, the liquidity value of an account becomes negative. In this case the value of an account’s borrowing outstanding exceeds their borrowing capacity.
Any Conflux Network address can participate in the liquidation process without any pressure and reliance on a centralized system. On a first-in-time basis, the liquidator can invoke the liquidation account’s outstanding borrowing.
When an account’s borrow collateral rate is far lower than the liquidation collateral rate, falling below 102%, the account will be placed into a margin call. When an account is place into a margin call, Flux Protocol’s designated liquidator will process the liquidation for the liquidation account. Liquidations due to a margin call result in losses, therefore, the liquidators (user participating in liquidations) must pay a 6% fee into a liquidation smart contract, which is the Flux Liquidation Reserve. The Flux Liquidation Reserve will be utilized for margin calls.
Figure 1- Collateral Rates
Withdrawal Limitation
To prevent liquidation risks that are caused by borrowers withdrawing their assets, Flux Protocol requires the collateral rate to be above 120% after borrowers withdraw their assets, unless the borrowers pays off the outstanding borrowings (loans).
Interest Rate Model
In the money market of each individual asset, Flux Protocol balances the interest rate automatically based on the assets supply relationship (funding utilization rate). The suppliers and borrowers do not need to negotiate terms and interest rates individually since the Flux Protocol has an interest rate model implemented. Each money market has independent interest rates. The utilization rate U for each money market a unifies the asset supply and demand relationship into one variable:
Borrows_a represents the outstanding loan balance in the money market a; Cash_a represents the balance of assets supplied to the money market a. Subjecting to economic principles, when borrowing demand is low, interest rates should be low; on the contrary, when borrowing demand is high, interest rates should rise. The borrowing demand is expressed by the utilization rate function. The current set borrowing interest rate (BorrowInterestRate_a) is obtained from the utilization rate and a base interest rate of 0.005：
Within one money market a, there is the following interest rate equilibrium:
The figure below shows the interest rate change influenced by the utilization rate, where the fund utilization rate is 0, the borrowing rate is 0.005 and the deposit rate is 0：
Figure 2- Interest Rate Change
Decentralized Autonomous Organization (DAO)
Flux Protocol requires that any modification to the protocol must be voted through the DAO, short for Decentralized Autonomous Organization, in order to be taken into effect. This decentralize the Flux protocol. In the early stages of Flux Protocol, the Flux Development Team will manage the DAO internally. After the Flux Protocol is complete and stable, the Flux Development Team will transfer the management authority of Flux Protocol to the DAO community.
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