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A loan can be refinanced by any party at any time. This encourages the terms of the loan to trend toward true market valuation as the LTV of the loan improves. Lenders compete for loans with better LTVs and borrowers experience automatic refinancing with better terms over the life of their loan. This results in a more equitable and value optimal debt market.
Borrowers can accept any offer in the order book and refinance at any time as long as the new offer amount is equal to or greater than the remaining principal plus interest earned by the lender and protocol so far.
All remaining payments and interest will accrue to the new lender.
A lender can refinance a loan at any time as long as the terms of the offer are at parity plus “1” of the current loan, and as long the lender has a sufficient balance to fill the loan amount.
The refinancing lender will need to pay the principal borrowed, interest earned so far, and a premium to buy out the loan.
Current lenders do not need to pay any premiums or supply additional capital. All remaining payments and interest will accrue to the new lender.
Four premiums have been implemented in the protocol's refinancing flow to drive value to borrowers and create a positive-sum game for lenders.
The majority of these premiums are paid to lenders when their offers are being refinanced on NiftyApes. The premiums implemented in the protocol are upgradable and, in the future, may be set according to community governance. Premiums only occur when an actor takes a greedy action. The protocol remains strictly unopinionated but influences actors to take or refrain from certain actions via incentives.
The first time a loan is refinanced, an origination fee of 00.50% (or 50 Basis Points) of the Principal amount loaned is paid by the Refinancer to the Loan Originator.
This is to compensate the Loan Originator for the initial work of pricing the asset and providing on-demand capital to borrowers.
Example Origination Fee
A loan is originated at
100Ξ for 10,000 Seconds at 10% interest rate == 00.50Ξ origination fee
Lenders can refinance any loan at any time if they provide terms at parity plus 1. Offers with improvements of as little as plus 1 second duration, plus 1 WEI principal, or minus 1 WEI interestRatePerSecond will result in a successful refinance. However, the protocol compares the refinance terms with the current loan to see if there is a combined improvement of plus 00.25% (25 basis points) in aggregate between the Principle, Duration, and Interest terms.
If the refinance offer fails this check, a flat premium equal to 25 basis points of the Principal is charged to the Refinancer as a Term Premium.
Net Improvement: +00.24%
Term Premium: 00.25% of Principal, e.g. 0.25 ETH
The Term Premium is sent to the Protocol treasury.
Lenders are guaranteed a minimum of 00.25% interest earned on any loan they serve, regardless of whether they originate or refinance the loan.
When a refinance offer is made, the protocol checks the amount of interest earned so far by the Current Lender. The delta between the amount earned and the 00.25% minimum must be paid by the Refinancer in order to assume control of the loan.
Once the Refinance has occurred the Interest Premium is reset for the new Lender, as they are now entitled a minimum of 00.25% interest earned on the loan they serve.
This creates a Dutch Auction on each active loan refinancing. As more interest accumulates, the Interest Premium declines closer and closer to 0. Refinancers must weigh the declining Interest Premium with the competition to refinance.
Current Loan 100Ξ for 10,000 Seconds at 10% interest rate
Interest Earned 0.001Ξ interest charged per second
At second 0, the interest premium is 00.25Ξ At second 100 the interest premium is ~00.15Ξ At second 250, the interest premium is 00.00Ξ
Since a lender can refinance any loan at any time, as a loan goes to default each individual lender has an incentive of the true market value (tmv), minus the principal (p) of the loan, minus interest earned by the lender (lie) and protocol (pie), minus the 00.25% default premium (prem), minus gas costs (gas). We anticipate a bottom-of-the-stack MEV auction to be the last lender in the last block of the active loan in order to gain this default profit incentive. Since this is a greedy action the protocol will charge a 00.25% default premium. If a lender participates in the MEV auction but fails to be the last lender they will be refinanced and have a max cost of the default premium + gas.
Asset tmv = 200Ξ
p = 100Ξ
lie = 9.9999Ξ
pie = 0.25Ξ
prem = 0.25Ξ
gas = 0.0025Ξ
Profit Incentive = 200Ξ - 100Ξ - 9.9999Ξ - 0.25Ξ - 0.25Ξ - 0.0025Ξ = 89.4976Ξ This creates a strong incentive for lenders to be the last lender in a defaulting loan with a tmv that is greater than the repayment cost.
As loans are refinanced, a borrower may have access to more liquidity than was originally available when the loan was initiated. The NiftyApes smart contract does not automatically enforce draw down of more capital because it would force a higher interest payment to be made by the borrower. However, a borrower may choose to draw down more value from the loan if desired. If a borrower attempts to draw down additional capital but the refinancing lender has not maintained sufficient liquidity to serve their refinancing offer, the remaining available balance of the lender will be added to the amount drawn on the loan and the current interest earned on the loan (the lenders profit) will be slashed. Lenders can only be slashed if the last action taken on the loan is a lender refinance, they can only be slashed once on a given set of terms, and they will begin to accrue interest again after being slashed. This incentivizes the lender to maintain sufficient liquidity on the protocol to serve their refinanced loan offers while also allowing the lender to utilize their liquidity across many loans, i.e. creating more offers than total liquidity they have deposited in the protocol. Rather than enforcing fractional reserve requirements, the protocol incentivizes lenders to maintain reasonable liquidity reserves for refinanced loans in order to not be slashed.
A borrower may also experience a better interest rate or longer duration on their loan after refinancing. A lower interest rate is in the clear best interest of the borrower to automatically accept and update. Likewise, a longer duration does not enforce a higher interest payment. The interest rate per second does not change and the borrower would pay more interest if they utilize the additional time, but if they repay their loan at the original loan duration they would pay no additional interest.