🔁Borrowing and lending

Fixed rate markets

Each time the protocol opens an expirable position for a user, borrowing and lending at a fixed rate occur on other DeFi protocols. At a high level:

• lending at a fixed rate is equivalent to buying a discounted zero-coupon bond

• borrowing at a fixed rate is equivalent to selling a discounted zero-coupon bond.

The maturity of the expirable needs to match the maturity of the zero-coupon bonds.

Contango uses different protocols to borrow and lend at a fixed rate. In this section, you would find more information about our integration with:

• Yield

• Notional

Flash swaps

Contango uses the concept of flash swaps to make the protocol capital efficient. Let's say a trader wants to buy 1 ETH with 100 DAI. Without using flash swaps the trader would need to first give DAI before receiving ETH. With flash swaps the trader could get 1 ETH first as long as the 100 DAI are given back in the same block. If that's not the case the transaction is reversed. This allows the trader, or a protocol such as Contango, to perform some actions between receiving the 1 ETH, at the start of the transaction, and giving 100 DAI at the end of the transaction.

Position opening

Let's start by taking the example in the position opening section, where a trader buys 1 expirable at $100.59 \: DAI$with $S_{L}=100.10 \: DAI$. The protocol owes a debt $D=50.59 \: DAI$. Let's say the borrowing requires a minimum collaterization ratio (CR) of 140% margin, i.e. the equivalent of $50.59*140\%=70.83 \:DAI$. The trader has only posted $50 \: DAI$as margin, i.e. $CR_{borrow}={50}/{50.59}=98.83 \%$, there is clearly not enough money to do the borrowing with over-collaterisation.

Using flash swaps on the spot market, e.g. on Uniswap, the protocol is now able to meet the collaterisation ratio requirement by:

1. first getting the $ETH$ to be lent

2. lending $ETH$ by buying its zero-coupon version $zcETH$, worth $0.9929 *99.90 = 99.19 \:DAI$

3. using this zero-coupon as margin to borrow the required fund. The collaterisation ratio for borrowing would be $CR_{borrow}={99.19}/{50.59}=196.07 \%$ which is above the required 140%.

4. Swap the borrowed $zcDAI$ for $DAI$.

5. use the borrowed $DAI$ plus margin to pay for the initial $0.9929 \: ETH$.

Flashswap steps to open a long position

Position closing

Contango closes a position by reverting the above steps. In the long example in the position closing section, the protocol follows these steps:​

1. $0.9924 \:ETH$ is repaid back from lending and swapped for $99.14 \:DAI$.

2. $DAI$ is exchanged for its zero-coupon bond version, $zcDAI$.

3. $zcDAI$ is then used to reimburse the debt and retrieve $zcETH$ which is worth $49.41 \:DAI$.

4. The margin is swapped for $ETH$.

5. $ETH$ is given back to close the flashswap.

Flashswap steps to close a long position