Image : Solution Architecture and components diagram
In Paxo Finance, every money market is trustless. All operations are anchored on a secure smart contract complying with an ERC-20 token specifcation. PToken balances represent users' balances. They can mint pTokens by contributing assets to the market or redeem pTokens for the underlying item. As interest builds up, the price (exchange rate) of pTokens and the underlying asset rises over time.
This is calculated as:
Interest Rate Model
Many protocols including dydx have adopted non linear interest rate models. More recent protocols like Aave & compound have adopted kinked rates. This model exhibits some form of kink: they sharply change at some defined threshold. Such interest rates are employed by a number of over collateralised lending protocols recently.
Paxo money markets are defined by an interest rate imposed uniformly on all borrowers. They are adjustable depending on the dynamic supply-demand relationship.
An Interest Rate Index captures the history of each interest rate for each money market. It is calculated each time an interest rate changes due to a user minting, redeeming, borrowing, repaying, or liquidating the asset.
Utilization Rate unifies supply and demand into a single variable, calculated as follows:
baseRate and multiplier are set through governance. Borrowing interest rates may resemble the following:
Oracle Price index
A Price Oracle tracks the current exchange rate for supported assets.
Paxo has delegated asset value determination to a committee that aggregates prices from the top ten exchanges. These conversion rates are used to calculate borrowing capacity and collateral requirements, as well as for any other function that requires determining the value equivalent of an account.
If a user’s borrowing balance exceeds their total collateral value due to market shocks forcing the collateral to depreciate, or borrowed assets increasing in value, the public function for liquidation can be called. This call exchanges the invoking user’s asset for the borrower’s collateral at a slightly better than market price.
Get the exchange rate and calculate the number of collateral tokens to seize:
Liquidation Incentive: Multiplier representing the discount on collateral that a liquidator receives Liquidator pays the repayAmount and receives seized collateral tokens.
The Paxo protocol does not support specific tokens by default; instead, markets must be whitelisted.
It is accomplished through an admin function that allows users to use the asset. There must be a valid price from the Price Oracle for a user to borrow an asset. At the same time, to use an asset as collateral, there must be a valid price and a minimum deposit factor