Lending returns and risks
A lender's income from a loan is fixed before anyone draws it. Whether it is a good outcome is not, because the protocol never checks what the collateral is worth. This page puts the pieces together, follows one offer through three loans, and then states plainly what a lender is exposed to.
- Repaid loan: principal + interest, less the protocol fee, plus any late fee
- Unrepaid loan: the collateral, all of it, whatever it is now worth
- The borrower can always choose not to repay
- Collateral makes a loan backed, not safe
- The interest is the price of the borrower's option to walk away
What a lender earns
On a loan that is repaid, the lender receives the principal back, plus the interest set in the offer, minus the protocol fee (a percentage of that interest), plus the late fee (a percentage of the principal) if the borrower repaid during the grace window.
On a loan that is never repaid, the lender receives the collateral instead, all of it, and none of the above.
A worked example
A lender posts an offer in the USDC market:
| Amount on offer | 1,000 sUSDC |
| Collateral | 3 sNIGHT for every 1 sUSDC borrowed |
| Interest | 10% over the term |
| Term | 14 days, with a 4 hour grace window |
| Protocol fee (set per market) | 10% of interest |
| Late fee (set per market) | 2% of principal |
Three borrowers draw from it.
| Borrower A | Borrower B | Borrower C | |
|---|---|---|---|
| Draws | 100 sUSDC | 500 sUSDC | 400 sUSDC |
| Posts | 300 sNIGHT | 1,500 sNIGHT | 1,200 sNIGHT |
| Interest | 10 | 50 | 40 |
| Protocol fee | 1 | 5 | 4 |
| Late fee if late | 2 | 10 | 8 |
| What happens | Repays on day 12 | Repays 90 minutes after the due date, inside the grace window | Never repays |
| Borrower pays | 110 sUSDC | 560 sUSDC | Nothing |
| Lender collects | 109 sUSDC | 555 sUSDC | 1,200 sNIGHT, seized after the grace window |
| Protocol keeps | 1 sUSDC | 5 sUSDC | Nothing |
| Borrower gets back | 300 sNIGHT | 1,500 sNIGHT | Nothing |
Adding it up
The lender lent 1,000 sUSDC and got back 664 sUSDC (109 + 555) plus 1,200 sNIGHT.
Whether that was a good outcome depends entirely on what 1,200 sNIGHT is worth, and the protocol has no opinion on that. When the offer was posted, 1 sNIGHT was worth about 0.5 sUSDC, so 1,200 sNIGHT covered C's 440 sUSDC debt with room to spare.
| If 1 sNIGHT is now worth | 1,200 sNIGHT is worth | Lender holds, in sUSDC terms | Against 1,000 lent |
|---|---|---|---|
| 0.5 sUSDC (unchanged) | 600 | 1,264 | Up 264 |
| 0.35 sUSDC | 420 | 1,084 | Up 84 |
| 0.2 sUSDC | 240 | 904 | Down 96 |
The last row is exactly the situation in which C chose not to repay: the collateral had fallen below the debt. The lender collected two interest payments and seized in full, and is still down. That is not a failure of the protocol. It is what the offer was: a loan the borrower may return, or may not, priced by the interest.
Risks for lenders
Collateral makes a loan backed. It does not make it safe. The difference is the whole of this section.
The borrower can always walk away
A borrower on AMP Finance can decide at any moment that the collateral is worth less to them than the debt, and simply not repay. Nothing stops them, nothing chases them, and the protocol earns nothing on it either. What the lender gets is the collateral, in full, whatever it is worth by then.
Because nothing checks prices during the term, the moment a borrower is most likely to walk away is exactly the moment the collateral has fallen in value. A lender who asked for 150% collateral by value on day one may find it is 90% by day fourteen, and it is on day fourteen that the borrower decides. A lender should expect, on average, to be repaid when the collateral has held up and to receive collateral when it has not.
Put plainly: the interest is the price of the borrower's option not to repay. Set it with that in mind.
What helps
- Choose collateral that is likely to hold its value against the lending token over the term. The shorter the term, the less can happen.
- Ask for more collateral than feels necessary. The interface suggests roughly twice the amount by value. The protocol does not care what is asked for; the lender bears the consequences.
- Prefer shorter terms where the collateral is volatile. A 3 day loan has far less room for prices to move than a 28 day one.
- Set the interest for the risk, not for the calendar. A flat 5% over three days is a very different price from 5% over four weeks.
Other things to know
| Nothing happens until the lender acts | Repayments are collected, not delivered, and collateral is seized, not swept. An offer with several loans needs several transactions to settle, one at a time. |
| The offer token is the only key | Losing it strands every repayment and every collateral on that offer. Losing or sending a position token. |
| Offers can be forced to fill all at once | A stranger can, at a cost to themselves, make partial draws of a particular size on an offer fail, so that only a draw of the whole remaining amount goes through. No money is lost. A lender who would rather offer in smaller pieces can post several smaller offers. |
| Capital in an unfilled offer is idle | It earns nothing until borrowed. Cancelling returns it at any time. |
| Test network today | The current deployment is the testnet. The tokens have no value, and the protocol has not yet been deployed on Midnight's main network. |