Jet Association 1.0.0
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Jet Fundamentals
What is Jet?
Jet Protocol is an open source, non-custodial, borrowing and lending protocol on the Solana Blockchain. Jet Protocol offers its users two core products:
- Margin loans: A flexible loan that a user can take out in supported assets from the Protocol paying interest fees.
- Margin deposits: Deposits that a user can make in supported assets to the Protocol in exchange for interest income.
All deposits are transferred by default to a common liquidity pool, which is then used as a source for borrowing. This means that there is no matching between individual borrowing and lending users.
Liquidity Pool
Governing Jet Products
Because Jet uses a liquidity pool instead of matching users one to one, it’s up to the Protocol to govern the mechanics and parameters of its borrowing and lending products. This includes, but is not limited to:
- Supported assets
- Collateralization ratios
- Liquidation
- Interest
- Fees
Jet Association is in the process of building infrastructure for decentralized governance and empowering JET token holders to decide on the above parameters through governance voting.
Supported Assets
An asset refers to the digital token, cryptocurrency, or digital asset used in the Protocol.
There are currently four assets that can be deposited in Jet to accrue interest or be used as a collateral for borrowing - USDC, SOL, BTC and ETH (as non-native assets, BTC and ETH are wrapped by Sollet). Note that Serum is sunsetting Sollet-wrapped ETH in the near term, and as a result it will be removed as a collateral type; more details to be announced.
Jet will soon be passing its first governance vote on what other asset type(s) should be added to the Protocol.
Debt Collateralization & LTV
All debt issued by Jet Protocol is secure, meaning that, to secure a loan, a user needs to first deposit a Collateral which will be used as insurance against default.
The Collateralization ratio (C-ratio) is the fair market value of deposited assets (collateral) divided by the amount the user is borrowing:
Defining C-Ratio
As an example - when you deposit $200 worth of Bitcoin as collateral, and then borrow $100 worth of USDC, the current C-ratio would be 200%.
Currently, to allow a user to borrow assets, Jet Protocol requires a minimum C-ratio of 125% (over-collateralization). If your C-ratio drops below 125%, the Protocol will automatically seize a portion of your collateral and liquidate it to bring the C-ratio back to a healthy level. To reduce the risk of liquidation, it’s always recommended to maximize your C-ratio, especially when the market is volatile. In Jet App, whenever you try to process a borrow or withdraw transaction that would bring your current C-ratio below 150%, the co-pilot system will alert you about increased liquidation risk. If your C-ratio drops close to the 125% threshold, you should either add more funds to increase the collateral value or repay the debt and close your position.
LTV or Loan-to-value ratio refers to the percentage of your collateral value that you may borrow against and is calculated using the formula:
LTV
LTV essentially provides the same insights as the C-ratio, but behaves inversely - when C-ratio goes down, the LTV goes up. As an example, if you borrow $5,000 and deposit BTC worth $10,000, your LTV ratio would be 50%. However, if the price of BTC were to go down, your collateral would be worth less, which would cause your LTV ratio to go up. Jet Protocol uses the LTV as a measure of risk when deciding how large of a loan to approve.
Liquidation
When a borrower’s C-ratio drops beneath 125%, a portion of their collateral is sold by the Protocol to a third party, called a liquidator. This is necessary to ensure that the protocol does not facilitate bad debt, which is a risk to the entire system. The liquidator pays for the collateral using the asset in which the debt is denominated, thereby (partially) repaying the borrower’s debt. The price at which collateral is sold is determined by an oracle and is intended to be a fair market price. If there is more than one collateral type in the deposit, the current version of liquidator picks a random collateral type to use for liquidation.
In addition, the liquidator is paid a Liquidation Premium as an incentive to manage the liquidation. Liquidation Premium is equal to a set rate times the dollar value of the repaid debt:
Liquidation
To pay the Liquidation Premium additional collateral is taken from the account of the user being liquidated. At Jet that Premium is now set at 3%.
Jet Protocol liquidates through limit order bids on Serum DEX, and may liquidate through additional venues in the future (ie swapping on Orca), pending governance approval.
Interest
Utilization ratio
The interest rates at Jet, both for borrowing and lending, are dynamic (always changing) and determined as a function of the utilization ratio of the asset.
The utilization ratio is the proportion of the total value of the asset locked in loans to the total value of the asset available (deposited) in the Protocol:
Utilization Ratio
For example, if a total of 1,000 USDC has been supplied to the platform in form of deposits and 500 USDC is currently being borrowed, the utilization ratio for USDC at that moment is 50%.
The higher the utilization ratio of the asset, the higher the interest rate (received by the depositors and paid by the borrowers) for that asset. The interest rate curve on JET was designed with three segments with interest increasing proportionally to the utilization rate:
Utilization Rate
Interest Rate
0% - 85%
0.5% - 6%
85% - 95%
6% - 40%
95% - 100%
40% - 160%
Jet Interest Rates
As the utilization ratio of an asset approaches 100%, the interest rate increases significantly. This dramatic increase in thee interest rate at high utilization is meant to draw capital to the platform quickly with the lure of high interest rates; thus assuaging liquidity risk. Liquidity risk is an inherent risk with all pool-based lending and borrowing dapps, resulting from the fact that not all lenders will necessarily be able to withdraw fully at the same time since most of the deposited assets in the pool have been lent out and are under the control of the borrowers. The steep third segment utilized by Jet combats that possibility.
The interest rate in Jet is expressed in annualized form, does not reflect the effects of compounding, is inclusive of any protocol fees that may be in place, and is instantaneous, both for the borrowers paying interest and for the depositors earning interest. For collateral and loan accounts, interest accrues and gets continuously compounded to the respective accounts of the user.
Interest rate spread
The interest rate spread is the difference between the lending and borrowing rates for a single asset, at a particular point in time. For example, if at this moment the USDC borrow rate was 11% and the lending rate was 24%, the spread for the USDC interest rate at that time would be 13%.
Interest rate spread
On average, the platform with tighter spreads offers better lending and borrowing rates. This is what Jet strives to provide — the tightest spreads, where both sides win and borrowers pay less in interest as lenders receive more.
Fees
Protocol fees
Currently, the Jet Protocol charges no fees, which means all interest paid by borrowers is delivered directly to depositors. Nevertheless, the fees can be turned on in the future (if approved via governance vote) to become a source of revenue for the DAO to be distributed to the ecosystem participants as returns for staking and participation in the governance.
Solana fees
Rent Fee: When you open your account on Jet, rent is charged by Solana which can be fully refunded in the future when you close all your account obligations on Jet. This is true for all protocols which allocate space per user on-chain.
Transaction Fees: Currently there is no extra Jet originated fee added to your transactions. Only the minimal transaction fees on the Solana network are required to handle your transactions on Jet. The Solana transaction fees are debited from your wallet when your transaction is processed.
Other products
Margin Accounts and Margin Trading
Beyond Jet’s native products, our cross-protocol margining solution (slated for release in Q2-Q3) makes it easy to borrow a cheap asset on margin for use as collateral in other supported protocols so that advanced users can benefit from borrowing opportunities throughout the Solana ecosystem.
Margin Trading: Spot
Among the external protocols supported by our margin program are trading venues like Serum and Orca. Users are able to trade on these venues through their margin accounts, and their positions contribute to their collateral for accessing loans from Jet. This means that users can get long or short, with leverage, on a wide variety of tokens. Long positions can be transferred into margin pools where they earn interest to offset the borrowing cost of the shorts.
Margin Trading: Traditional
Traditional lending and borrowing protocols like Solend and Port are also integrated with the Jet margin program. This opens up new trading opportunities for Jet users to efficiently arbitrage interest rate disparities across these platforms, with leverage.
Integrations with other Solana projects
With the introduction of flexible margin accounts, there also exists a nearly limitless realm of interesting integrations with other protocols. Margin accounts can extend the functionalities of other Solana dApps through collateralization and borrowing. For example, the senior tranche of a vault at Vyper Protocol might be collateralized by a Jet margin account, and then used to deposit additional assets into the junior tranche and thus amplifying yield, with the tradeoff of the additional risk of liquidation if the underlying collateral value diminished significantly.
Bond markets & unsecured loans
In addition to the Margin Loan and Deposit, in Q3 2022 Jet will offer two new products: fixed-term Bond tickets for borrowers, countered by Bond funds at depositors’ side and Credit swaps from unsecured to secured loans, paired against the Credit funds.
Bond Markets
Properties
Lender
Borrower
Product
Zero-Coupon Bond
Zero-Coupon Bond
Type
Fixed-Rate, Fixed-term
Fixed-Rate, Fixed-Term
Description
The lender buys bond tickets from borrowers at a discount to face value, and stakes these tickets to redeem the full face value at maturity.
Use Jet bond markets for loans with an interest rate fixed upfront for a fixed period of time. These loans can be rolled automatically or be fully or partially repaid at any point.
Example
Lilah the lender has 10,000 USDC available to lend for 24 hours.
Bob the borrower is looking to borrow 10,000 USDC against SOL collateral.
Lilah stakes 10,001 tickets to the bond program.
Bob sees that he needs to sell 10,001 24-hour USDC tickets to receive 10,000 USDC. Bob interacts with the margin program which places a claim for 10,001 USDC against his collateral, mints 10,001 24-hour USDC tickets, and delivers these to Bob who sells them for the 10,000 USDC he was looking to borrow.
Lilah is able to claim her 10,001 USDC by burning her staked tickets
24 hours later the bond program is triggered to manage Bob’s obligation. It mints and sells 10,002 24-hour USDC tickets for 10,001 USDC. Bob’s obligation now has a face value of 10,002 USDC and a new 24-hour timer.
In practice, lenders will typically not use the bond markets directly, but rather invest in bond funds that will do so on lenders’ behalf. The bond funds will be presented as savings accounts that invest in secured debt via Jet bond markets to generate yield for users. These function like call accounts with a notice period for withdrawal (e.g. a user who invested in a 24-hour USDC fund must give 24-hours of notice in order to withdraw from the fund)
Unsecured Loans
Properties
Lender
Borrower
Product
Credit Funds
Credit Swap
Type
Fixed-Term
Fixed-Term
Description
Savings pools that stake deposited tokens as collateral for nominated borrowers to access secured funding. Depositors bear the risk of default of nominated borrowers in exchange for compelling yields on supported collateral types. If the borrower fails to manage their bond program obligation successfully, the collateral will be liquidated in the normal way.
Created by a borrower looking to leverage their reputation to attract credit providers and take out an unsecured loan. A lender who trusts the borrower (or seeks higher returns with higher risk) may stake appropriate collateral to the swap. This collateral may then be used by the borrower to mint and sell bond tickets in the indicated market. The borrower is expected to pay the premium into the swap on the tenor interval.
Liquidity Component
Not applicable
Interest rate to be paid for the secured loan as implied by ticket prices
Credit Component
Premium received from the borrower in the credit swap
Premium to be paid to collateral stakers in the credit swap.
Links
For more insights on Jet, please visit:
Last modified 2mo ago