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Tectonic enables users to supply their cryptocurrencies (assets) onto the platform as a liquidity provider. Tectonic protocol aggregates the supply from each user into a pool of assets controlled by smart contracts, making it a fungible resource for the protocol, while allowing users to withdraw their supply at any time.
In return for their supplied assets, liquidity providers will receive corresponding tToken (e.g., tETH, tUSDC), which entitles them to redeem the supplied assets in the future. The value of tToken will continuously increase reflecting the deposit interest rates, which is set as a function of the supply & demand of the assets.
Using their supplied assets as collateral, users can borrow supported cryptocurrencies from Tectonic’s asset pools to be used for any purpose.
Each asset carries a Collateral Factor (i.e., Loan-to-Collateral ratio), which signifies the amount available to be borrowed for each collateralized asset A Collateral Factor of 75% means that the users can only borrow up to 75% of the value of their collateralized assets.
Should the value of the collateralized assets drop, or the value of the borrowed assets increase, a portion of the outstanding borrowing will be liquidated at the current market price minus some liquidation discount. The proportion of the borrowing assets to be liquidated varies depending on assets and market conditions. Users can prevent the liquidation event from happening, either by increasing the amount of collateral (i.e., supplying more assets) or by repaying some portion of their loan. Each loan will carry a compounded interest rate and can be repaid at any time.
The Collateral Factor for each asset is set based on several inherent characteristics of the asset, such as availability in the reserve and asset’s liquidity in the market. These ratios and their parameters are currently determined by the Tectonic team, however as the protocol matures and the necessary processes are in place, the governance of these parameters will be opened to the community via Tectonic’s governance process.
For collateralized assets, there will be a 10% cushion in place to prevent accidental or unwanted liquidations. An example of the calculation is shown below. This initial ratio will then be allowed to drift upwards to the asset's max collateral factor if there are changes in the asset's price.
When withdrawing collateral, this cushion rule will also be in place. This means that post collateral withdrawal, your new LTV cannot be above the Maximum Eligible LTV. In order to withdraw, you will have to pay back more of your existing loan. An example of this can be found here in Step 2