Decentralized finance (DeFi) gives individuals access to powerful financial products and markets, such as crypto lending, in which users lock their crypto assets as collateral for a loan.
However, existing DeFi lending apps have a number of inefficiencies. Cosmos-based DeFi financial suite Nolus Protocol aims to address these inefficiencies with a new concept, the DeFi Lease. Here’s how it works.
What is the Nolus DeFi Lease?
The DeFi Lease applies the model of leasing from traditional finance to the world of decentralized finance.
Conventional leasing enables customers to secure assets by paying a portion of their total value upfront; they can use them for the duration of the lease, and take full ownership after settling the loan.
With the Nolus DeFi Lease, users can deposit cryptocurrency into the Nolus Protocol and receive up to 150% financing on the initial investment, gaining additional exposure to tokens while addressing crypto’s stringent over-collateralization requirements.
What problems does Nolus solve?
In conventional crypto lending, users employ overcollateralized loans, locking up a higher value in crypto as collateral than they intend to borrow. While this limits the risk of liquidation, should the collateralized tokens drop in value, it introduces inefficiencies.
Overcollateralized loans lock up collateral that could be used to minimize counterparty risk. DeFi leasing on Nolus mitigates against this by offering financing up to 150% on the initial investment, reducing the level of collateralization by a factor of 3.
Traditional liquidation methods employed in DeFi also represent a significant risk to borrowers, whose entire position can be liquidated at a discount. Nolus employs partial liquidations, which only liquidate a portion of the collateral when the asset price drops by around 30%, giving borrowers more time to recover their position. Nolus claims that liquidation rates for its DeFi lease are 40% lower than the market average (all parameters equal).
Nolus also locks interest rates at the moment the DeFi lease smart contract is created, addressing the issue of variable interest rates on conventional DeFi lending solutions.
While parked in the smart contract, the leased assets are locked alongside the downpayment. However, users can put the underlying leveraged assets to work for them, using yield bearing strategies whitelisted by Nolus. Once the loan is fully repaid, the user gains complete ownership over the underlying assets.
How does the Nolus DeFi Lease work?
A Nolus user can increase their exposure to desired crypto assets using DeFi leasing.
First, they deposit a cryptocurrency into Nolus, borrowing up to 150% of the initial down payment from the platform, denominated in their preferred cryptocurrency. Supported assets include ATOM, OSMO, TIA, AKT, NTRN , wrapped Bitcoin and Ethereum, and others.
The down payment and the loan are automatically swapped into their desired cryptocurrency, effectively leveraging the user’s holdings up to 150% of their initial investment. Both the down payment and the loan are stored in a smart contract instance, acting as collateral—which Nolus claims reduces the margin call risk.
The user can repay the loan either by providing more funds, or repaying it using the assets within the DeFi Lease itself, assuming the price of the asset has appreciated.
Disclaimer
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.