Reserve Price Lending

SUMMARY

Reserve Price based Lending is the deterministic lending based on lender underwritten collateral valuation. Reserve Price Lending is derived from Interest Rate <> Reserve Price Invariant and it allows for higher granularity, increased competition amongst lenders, and accurate pricing of risk.

What is Reserve Price based Lending?

Reserve Price is the amount of supply asset lender is willing to lend plus the interest receivable per unit of collateral. Instead of optmistically accepting the market/pool parameters, MethLab Lenders enter the Reserve Price they are ready to offer for the given terms to indulge in Reserve Price based Lending. Reserve Price lending is deterministic, granular and defined as lenders make the market by underwriting at their own terms.

Interest Rate - Reserve Price Invariant

The Interest Rate - Reserve Price Invariant maintains that a fundamentally stable equilibrium exists between the interest rates and reserve price lenders offer. This stable equilibrium ensures that lenders can offer varying Reserve Prices based on market dynamics and individual risk adjustments while still maintaining a consistent relationship with a chosen Interest Rate.

The Invariant

Reserve Price - Interest Rate Invariant fundamentally establishes that at a given time, $t_0$ and static market parameters about the collateral asset A, $M_{A,t_x}$— such as volatility, spot price and so on. For any arbitrary amount of buckets $n$ with interest rates $I_{Bucket0}$ to $I_{Bucketn}$ where $I_{Bucket0}$ < $I_{Bucketn}$, Lender can calculate an option chain with strikes $P_{I_{Bucket0}}$ to $P_{I_{BucketN}}$ respectively where $P_{I_{Bucket0}}$ < $P_{I_{BucketN}}$ . This is similar to writing a cash secured put option and receiving a premium that is calculated from the interest receivable.

What does it mean?

• Dynamic Loan Parameters

MethLab enables dynamic adjustments of loan parameters, such as interest rates and term, rather than using fixed parameters. This dynamic approach allows the system to adapt quickly to changing market conditions, promoting flexibility and responsiveness. Traditional platforms often rely on static parameters derived from simulations or contributor decisions, are prone to recognition and action lag. that can cause loss of user funds.

• Concentration of Liquidity

Liquidity concentration has flywheel effects that increases competition and reduces the transaction costs. The Invariant helps in concentrating liquidity by simplifying and guiding loan parameters. This concentration facilitates easier matching of lenders and borrowers, while being able to offer better user experience for both lenders and borrowers.

• Flexibility and Market Responsiveness

The Invariant's stability enables swift adjustments to loan parameters, ensuring that the system remains responsive to dynamic market conditions. This benefits both lenders and borrowers by providing more favorable terms at any given point of time.

• Enhanced Lender Risk Management

MethLab's dynamic model offers Lenders to granularly underwrite each position allowing for more favorable terms tailored to current market conditions. This personalized approach enhances the borrower experience compared to platforms with static parameters.