Instead of traditional pools other lending/borrowing protocols use, Qonstant uses a marketplace model. Let’s take a closer look at what this is and the differences and advantages are.
Why do price discovery issues matter?
Traditional lending/borrowing protocols usually using a pool model. A pool consists of a token or a pair of tokens. Lenders interact with the pool by sending their assets while the interest rates are floating, meaning that today you can get 3% APR for your ETH, and tomorrow it could drop as far as 0.8%. This is an illustrative example, but this is the logic of the work, and there are some problems with it.
By lending tokens to the pool or borrowing them, you do not choose either the terms or the interest rate. It’s done by a static Interest Rate Curve that deterministically adjusts the floating interest rate based on the usage ratio of borrowers to lenders in a particular market. However, the Interest Rate Curve itself is set a priori, and there are no guarantees that the curve has been configured appropriately to reflect the actual supply/demand and price discovery.
Instead, Qonstant uses a marketplace model. In simple terms, it is similar to exchange trading, where some users create orders to sell and others to buy. Such orders are called quotes in Qonstant, which are analogous to limit orders on exchanges.
The marketplace model means the “market” determines the buy/sell price. There is no settled model behind it, only math. Users specify the desired prices and terms, and the orderbook operates with placed quotes. You can either create your quote with the desired terms or complete a quick trade and open a position (accepted quote) based on the average indicators of this market.
Therefore, the current market rate for the APR on loans is determined by the supply and demand of market participants themselves. This is the purest mechanism for price discovery of current interest rates.
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Pool vs. Marketplace: Pros and Cons
The pool model in crypto is known to everyone who uses DeFi, while the marketplace model, which uses an onchain orderbook, is an innovation in this area. At the same time, however, the logic itself is quite familiar and known to all exchange users.
The onchain orderbook is the most transparent mechanism for conducting transactions as everything is reflected in the blockchain, and any user can track them.
The pool’s advantage requires less involvement as a user simply deposits or borrows funds at the current price without waiting for someone to fulfill the terms of the order. Utilizing the best of both models, we created a similar tool in Qonstant (Quick Trades) that allows users to execute orders at the current average price, similar to spot trading.
Orderbook-style products can also more easily support different kinds of assets. Pools are typically limited to “delta-one” assets that can be deposited by liquidity providers, like ETH or BTC. Orderbooks, however, can trade any type of asset.
Orderbook exchanges, such as Qonstant, enable markets to balance supply and demand automatically.
The best available APR for borrowing and lending in an orderbook reflects what people are willing to pay and earn at any given time. If market action ever becomes one-sided (e.g., everyone is lending), then the market APR will continue to decrease until lenders no longer feel it is worthwhile to lend in that market. Orderbooks are like metaphorical scales that tend to balance themselves over time.
The only caveat to this behavior is liquidity — markets must be liquid (i.e., have many quotes) for this to work.
How does APR calculate?
Qonstant’s loans are quoted using an Annual Percentage Rate (APR). This is the one-year rate for a loan.
The actual amount of interest paid/earned for a borrow/lend position is pro-rated based on the duration of the loan. For example, if you borrow $100 at a 4% APR for 91 days, you will have to repay your loan amount plus approximately $1 of interest (= 91/365 * 4% * $100).
It’s also worth noting that Qonstant’s fees are quoted as an APR — you only pay a fee for the duration of the loan.
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