Pawnfi
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Risks Control
The main potential risk of Pawnfi is the default risk of borrowers (asset holders) and lessees.
Because some Non-Standard Assets do not have a uniform market fair price, especially the rare ones, the price often varies from person to person. Therefore, in the early stage of the Pawnfi product, there is no uniformed clearing threshold for asset price fluctuations.
To maximize the risk protection for Pawnfi users, we will apply different risk control mechanisms.

Risk Control for Pawn

Crowd-Lending (Assets with lower liquidity/ turnover rate)

  • The whole mechanism is embedded with automatic risk control barriers as Loan amount is not related to fluctuated market price and is always overcollateralized. A natural buffer zone would be formed to mitigate the default risk.
  • Default may not always be due to price fluctuation, but due to terrible cashflow management from borrower. Given lenders will have the first priority to bid for the NSA (if we have multiple lenders), possible high capital gain will be the best compensation to their exposed risk.

Pool-Lending (Assets with higher liquidity and good reference price, ex. gaming NFTs in Axie)

  • Oracle will be introduced to identify clearing threshold.
  • Only whitelisted asset voted/ decided by Pawnfi DAO will be eligible for Pool-Lending.
  • Crowd lenders will form as a first layer risk protection (Pool will only take up the loan until the Crowd contributes).
  • When Loan-to-Value > 80% (value of collateral is decreasing), Pawnfi will kick of liquidation.

Fast Loan (Good liquidity assets like BTC/ ETH/ Altcoin)

  • Oracle will be introduced to identify clearing threshold.
  • Only whitelisted asset voted/ decided by Pawnfi DAO will be eligible for Fast Loan.
  • When Loan-to-Value > 80% (value of collateral is decreasing), Pawnfi will kick of liquidation.

Installment Plan

To further mitigate the default risk, Pawnfi has introduced "Equal Total Payment" as an installment plan. Unlike normal market practice that lenders are subject to uncertainty of on the fly repayment, installment plan will anchor the interest amount and split total payment evenly into predefined dates. Therefore, even if the collateral asset's value fluctuates significantly, as long as the borrower is still performing repayment on time, there is no need to initiate liquidation. Another benefit is that lenders would also be more willing to contribute to high value loans.

Risk Control for Lease

There is actually low sunk cost compared to asset value because the requested deposit is embedded with target selling price and haircut. When default happens, it is in analogous to asset holder selling the asset to lessee at a price higher than target selling price, which compensates the risk exposure.
Last modified 2mo ago