🗝️Liquidation-Free

Normal Money-Market Liquidations

On normal money markets, users borrow tokens by first depositing an amount of greater value in another token as collateral. Money markets require over-collateralization. The problem is that token prices fluctuate, when if the value of the borrow climbs too close to the value of the deposit the portfolio is declared insolvent and faces liquidation. In a liquidation, a percent of the user's collateral is taken by a liquidator, swapped into a percent of the user's borrow, repaid to the protocol, and the liquidator keeps an excess collateral for themselves. All protocols try to balance that excess so it doesn't hurt the portfolio too much, but is still enough to incentivize any would-be liquidators. This is a painful process because sometimes prices are just spiky, and a liquidated portfolio might have perfectly recovered had no liquidators touched it. Or a user simply didn't respond fast enough to recollateralize their position. Regardless of the sitution, liquidations are almost always painful, which is why Nashed does things differently.

Nashed Insolvency

Nashed portfolios can opt into liquidation insurance. They can either insure an entire portfolio or just a single borrow.

When they opt into liquidation insurance, perpetual synthetic options are automatically opened for all positions on any protocols that offer them (for now, just Itos but more like Dopex and Panoptic will come soon). The Nashed interface calculates the correct strikes, finds the cheapest, and locks them in. This can be unlocked at anytime.

Now if the portfolio's borrow value goes too high, the options values cover the difference and the entire portfolio remains solvent.

There is of course a cost to this. The cost is usually the borrow rate minus the lending rate of the lent tokens. What this means is that the lending returns are reduced when one locks their portfolio against insurance. This is why Nashed also allows pair-wise secures which reduces costs by avoiding unneeded insurance.

A common scenario to use this is with tokens that don't have much utility. For example, if you have DUD tokens that don't do anything and no one is borrowing, you can deposit it, borrow ETH and USDC at 4%, liquidation-lock the portfolio for cheap (since no one is lending/borrowing anyways) and ETH/USDC LP to earn LP fees & rewards.

Only when the portfolio enters insolvency, does the liquidation-lock become expensive. But despite the cost, it is still cheaper than losing a quarter or more of your portfolio to liquidations.

What if someone's borrow increases in value and they just run away with the borrow and leave their collateral behind? That's totally fine! Eventually the insurance will burn through the collateral and that will be given as fees to the Itos liquidity providers. Nashed is never at risk.

Nashed Re-Solvency

Once a liquidation-locked portfolio becomes solvent again, the user can do anything as if nothing happened. The liquidation insurance becomes cheap again and the user can decide if they want to unlock or leave it.