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## Lending retrospective


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Lending and credit have been an integral part of human society for thousands of years, with the first evidence of loans in human history taking place in Mesopotamia approximately 5000 years ago. Since then, lending markets have evolved to assume many different forms including consumer lending, student loans, mortgages, corporate debt and government bonds.

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Fundamentally, lending is intricately related to the concept of trust and the promise of repayment. The act of lending is to lend money, to earn interest, and to be paid back. The term *credit* itself comes from the mid 16th century France, meaning to believe and trust. Lending has now become one of the most important financial activities in society. It fuels economic growth and cultivates forward-looking commercial activities. The size of the world’s debt markets as of 2019 was [estimated](https://arxiv.org/pdf/2104.00970.pdf) to be more than $255 trillion or nearly $32,500 for each of the world’s 7.7 billion people, and more than three times the world’s annual output.

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**Despite their respective particularities, most DeFi lending protocols share two features:**

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* They deviate from existing subjective frameworks of centralized credit assessment to codified collateral evaluation.
* They employ smart contracts to manage crypto-assets.

## DeFi’s Borrowing and Lending Models


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Today’s decentralized borrowing and lending platforms use one of two variations: collateralized debt markets (CDMs) and collateralized debt positions (CDPs). Protocols that use the CDM model, such as AAVE and Compound, transfer existing crypto assets from lenders to borrowers and can therefore be thought of as two-sided markets. Protocols that use the CDP model, such as MakerDAO, allow users to mint new crypto assets backed by their collateral, effectively creating a single-sided market where the user does not need to rely upon other participants to source liquidity.

 ![Source: From banks to DeFi: the evolution of the lending market by Jiahua Xu and Nikhil Vadgama](https://cdn.hackernoon.com/images/BS7huqfHGNajInTMmtqJEnCPpiD2-af2q3g8f.png)

Decentralized financial services have different purposes and functionality, but their token economic models are mostly weak and do not allow long-term value capture. The majority of their token value is based on speculation without sustainable organic drivers. During the time crypto assets holders were looking for the ability to keep the value of their crypto without touching fiat currencies and later simplify their ability to move the value back from stability to volatile coins. But with a full spectrum of DeFi lending enabled, will mean that borrowers and lenders can seamlessly find yield and maximise their economic returns with whatever tokens and assets they wish to hold, without needing to go through any centralised intermediaries.

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Centralized stablecoin platforms contain a risk of censorship, reducing their long-term viability. Some services also face problems related to questionable asset management practices and the possibility of off-chain assets being frozen or taken by governments. More “compliant” centralized services can blacklist addresses and freeze accounts, increasing transaction censorship risk.

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[Unit](https://unit.xyz) is a DeFi project that allows its users to create collateralized debt positions (CDPs) and mint the protocol’s native stablecoin, USDP from a wide variety of cryptoassets on both the Ethereum network and Binance Smart Chain.

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 ![It is empirically possible to place Unit in this place on the diagram.  ](https://cdn.hackernoon.com/images/BS7huqfHGNajInTMmtqJEnCPpiD2-1l1bw3gfm.jpeg)

## Collateralized Debt Positions: CDP


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Users who need access to dollars, but do not want to part ways with their assets, offer up their assets as collateral in order to receive an on-demand loan. While in possession of the loan, the customer accumulates interest on their outstanding debt. Assuming all goes according to plan, the customer will repay their loan plus interest and retrieve their collateral. If the customer is unable to repay the loan, the pawnbroker takes possession of the customer’s assets and sells them to cover the defaulted loan payment.

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While functionally similar to MakerDAO, Unit targets a different market segment – the speculative holders of long-tail cryptoassets. The concept of the long-tail was originally used to describe a phenomena found in retail product sales distributions where a large number of products sold in small quantities. The long-tail is contrasted with the small number of best-selling products known as the head.

## Price feed


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In Unit, every USDP is fully backed by provided collateral. If the debt/collateral ratio exceeds a Liquidation Ratio(LR) for a CDP, it will be subject to liquidation. Anyone can trigger liquidation by sending a trigger transaction. There are liquidation bots that consistently monitor CDPs and trigger liquidations if the stated condition is met. After a CDP is triggered for liquidation, a Dutch auction starts for underlying collateral with a linear decrease in price. Every participant can buyout the part of the collateral for the current price by paying the USDP debt for a liquidated CDP. User can also mint $USDP at fixed annual stabilization rate of 2.9% by using more than 130 collateral types.

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Unit protocol also needs price data for system contracts to know the current price of provided collaterals and addresses this issue with using Chainlink oracle as the primary oracle to receive collaterals' price. Additionally to the solution, in reserve, Unit has another Keydonix-based oracle solution, based on Uniswap V2 embedded TWAP oracle.

## Risks


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Unit’s experimental nature exposes it to a few notable risks. Similar to MakerDAO, Unit is also exposed to the risk of system under collateralization in the case of a black swan event. While the project has performed as expected during recent market stress tests, there is always a chance that Unit is unable to liquidate assets fast enough and is left with collateral that is worth less than its USDP loans. To ensure functionality and resilience, Unit implemented different architectural features, as well as a flexible approach for each token setting, such as collateral rate requirements, liquidation fees and interest rates.

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**Quack!**

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 ![](https://cdn.hackernoon.com/images/BS7huqfHGNajInTMmtqJEnCPpiD2-cc73ggl.jpeg)

## Inspired by:


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* <https://arxiv.org/pdf/2104.00970.pdf>  - From banks to DeFi: the evolution of the lending market by Jiahua Xu and Nikhil Vadgama.
* <https://messari.io/article/unit-protocol-more-than-a-degen-s-new-favorite-toy> -

  Unit Protocol: More Than a Degen’s New Favorite Toy by By Chase Devens.
* <https://docs.unit.xyz/how-to-use-unit-protocol> - Unit Protocol Docs.
* <https://hackernoon.com/defi-and-stablecoins-is-it-a-match-hp1c34li> - HN article.
* <https://hackernoon.com/what-is-unit-protocol-and-why-does-it-matter-vs2733f7> HN article.

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Redacted by [Officer](https://twitter.com/officer_cia) 😎

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