Zero-Liquidation Loans: A Structured Product Approach to DeFi Lending

TL;DR

Zero-liquidation loans in DeFi enable borrowing against ETH without liquidation risk, offering robustness against crashes and higher yields for liquidity providers, representing a novel structured product approach.

Contribution

This paper introduces a structured product design for zero-liquidation loans in DeFi, enhancing stability and risk management compared to existing protocols.

Findings

More robust against flash crashes

Lower financial contagion risk

Higher yields for liquidity providers

Abstract

Zero-Liquidation loans allow DeFi users to borrow USDC against their ETH holdings, but without the risk of being liquidated in case of LTV shortfalls. This is achieved by giving users the option to repay their loans, either in USDC or through their previously pledged ETH (the concept can be generalized to other currency pairs as well). Liquidity providers, on the other hand side, are compensated with a higher yield for bearing the ETH downside risk. A positive side effect of zero-liquidation loans is that they are more robust against flash crashes and have a lower financial contagion effect than current lending and borrowing protocols.