Tokenization of Continuous Forward Rate Agreements in Decentralized Finance

Short Answer Questions

What is overcollateralization and what is its role in CDPs? Overcollateralization refers to a state in which the value of the collateral is higher than the value of the borrowed assets. In CDPs, overcollateralization is required to ensure that the loan is secured even when the value of the collateral decreases, reducing the risk for the lender.

How does the DAI stablecoin maintain its peg to the US dollar? DAI maintains its peg to the US dollar through collateral liability positions (CDPs), automated feedback mechanisms, and external incentives. When the price of DAI is below $1, the system will increase the stability rate or DSR to incentivize users to destroy DAI or increase DAI demand; conversely, when the price of DAI is above $1, the system will reduce the stability rate or DSR to incentivize users to generate DAI or reduce DAI demand.

Explain the concept of the DAI Savings Rate (DSR) and its impact on the DAI ecosystem. The DAI Savings Rate (DSR) refers to the annualized interest rate that users can earn by locking DAI in the DSR contract. Changes in the DSR affect the supply and demand of DAI, which in turn affects the market price of DAI.

How does the Continuous Forward Rate Agreement (CFRA) provide fixed interest rates for borrowers and depositors? CFRA does this by setting a fixed interest rate between borrowers and depositors. When the external interest rate (such as the DSR) is lower than the fixed rate, the borrower needs to pay the depositor the difference; conversely, when the external interest rate is higher than the fixed rate, the depositor needs to pay the borrower the difference.

What role do intermediaries play in CFRA? Intermediaries play an important role in CFRA, including assessing collateral risk, determining the pricing of CFRA contracts, matching borrowers and depositors, and managing the execution of CFRA contracts.

Describe the two types of custody used in CFRA. There are two types of custody used in CFRA: the first is a centralized custody that holds tokens representing the borrower and depositor's positions in the CFRA contract; the second is a centralized or decentralized custody that holds the borrower's CDP control and the depositor's DAI as collateral for the CFRA contract.

Explain how CFRA contracts are secured. CFRA contracts are secured by tokenizing the control of CDP contracts, which represent ownership or income rights to the collateral and are used as collateral for the CFRA contract.

How is the term of a CFRA contract determined? The term of a CFRA contract is usually pre-set by a smart contract, but it can also be extended by agreement between the parties.

What happens if the value of the collateral falls below the liquidation price in a CFRA contract? If the value of the collateral falls below the liquidation price, the CFRA contract is liquidated and the parties' positions are settled based on their gains and losses in the CFRA contract.

Describe how borrowers and depositors receive their payments when a CFRA contract expires. When the CFRA contract matures, the borrower needs to repay the loan principal and interest, and the depositor can recover the deposit principal and interest. If the borrower fails to repay on time, the CFRA contract will be liquidated and the depositor will receive corresponding compensation based on his position in the CFRA contract.

Glossary

Decentralized Finance (DeFi): A blockchain-based financial system that aims to create a more open, transparent and decentralized financial system.

Continuous Forward Rate Agreement (CFRA): An interest rate derivative that allows users to exchange cash flows at a predetermined interest rate over a period of time.

Tokenization: The process of converting assets or rights into digital tokens that can be traded and managed on the blockchain.

MakerDAO: A decentralized autonomous organization that manages the DAI stablecoin.

DAI: A decentralized stablecoin pegged to the US dollar.

Collateral Liability Position (CDP): A mechanism for users to generate DAI by pledging crypto assets.

DAI Savings Rate (DSR): The annualized interest rate that users can earn by locking DAI in the DSR contract.

Stability Fee: The fee paid by CDP users for generating DAI.

Liquidation: When the collateralization ratio of a CDP falls below the minimum requirement, the system forces the sale of collateral to repay the debt.

Smart Contract: A self-executing contract stored on a blockchain whose terms are defined by computer code.