Arcadia Lending

Arcadia Lending

Arcadia Lending is one example of a Creditor, developed by the Arcadia team and designed specifically to work together with the Arcadia Accounts.

More specifically, the USDC lending pools and wETH lending pools are two separate Creditors, each working in union with Arcadia Accounts. The liabilities and Account values will be expressed using USDC and wETH as numeraire, respectively.

Each lending pool can consist of multiple Tranches. A Tranche is a slice of the total liquidity in the pool, where risk-reward can differ to other Tranches. For example, the Junior Tranche (or Insurance Tranche) can receive a larger portion of the interest payments and a larger portion of the liquidation penalties, but may be slashed first should any bad debt occur. Similarly, the Senior Tranche may have lower yields through interests and liquidations, but will only be slashed through bad debt as soon as the whole Junior Tranche is wiped out due to slashing. With some game-theory in mind, the overall risk-reward of the Junior Tranche will be higher than the Senior Tranche.

At the start of Arcadia V2, only a single Tranche will be available per pool. The team decided on this to reduce the complexity during the onboarding of users. In a further stage, a second (or even third) Tranche can be added. We even reserve the option to add a dedicated Insurance Tranche as most junior Tranche.

Any interested party can deposit funds into the USDC lending pool, the wETH lending pool or both. Users whom deposit (LPs) receive an ERC4626 yield bearing token (ybToken) in return, specifically for the Tranche in which the user deposited. This ybToken automatically accrues in value. All deposited funds (for one given Creditor) will reside in a single liquidity pool, independent of the amount of Tranches associated with it. As such, it forms a single pool of assets that can be used by borrowers.

Any interested party possessing an Arcadia Account with at least some value, can borrow from the lending pools against an Account they own. More specifically, should Account 1 decide to take out debt from the Arcadia Lending USDC pool, the numeraire of the Account 1 will also be set to USDC. From that moment on, all values and liabilities on the Account 1 will be expressed in USDC, since that’s the unit of accounting of its Creditor.

The Account for which debt is taken out, will receive a debt bearing token (dbToken) which is not transferable. Similarly to the ybToken, the dbToken will increase in amount representing the interests paid by the borrower to the liquidity providers. Since only valid Arcadia Accounts can mint dbTokens, and since they are not transferable, every holder of a dbToken is per definition an Arcadia Account.

There are two main flows in which debt is taken out within the Arcadia Protocol. The first and simplest one is a non-leveraged borrow. An Account owner can take out debt against their Account, without changing the state of the Account itself. Borrowed funds will be sent to the wallet of the Account owner. Since borrowed funds are not deposited within the Account, one cannot use leverage this way. This first flow is most comparable to traditional lending protocols.

The second flow is more complex but also gives users much more freedom and flexibility. Arcadia introduces ‘optimistic borrowing’ through its lending pools. Account owners can request to borrow funds and use these funds throughout DeFi before a health check is completed. Naturally, the transaction will revert when the health status is not sufficient at the end of the transaction.