Loan Interest Distribution

When a Borrower pays interest on a loan, the interest is distributed amongst the parties that have a claim on that interest payment: the Lenders into the relevant Pool, the First Loss Capital Provider and the Protocol.

Firstly, the protocol earnings are allocated by taking a percentage of the paid interest. This percentage value is determined by the Protocol Fee Percent (protocolFeePercent) parameter. This parameter has a default value of 20% which can be modified by the Protocol Governance and is bound between 0% and 50%.

Secondly, the First Loss Capital Provider’s earnings are calculated. The First Loss Capital Provider’s earnings are dictated by the Staker Earn Factor (stakerEarnFactor) parameter, controlled by the First Loss Capital Provider. This is a percentage value representing the First Loss Capital Provider’s relative earn factor compared to a Lender, per unit of funds in the pool. A Staker Earn Factor value of 100% corresponds to 1x leveraged earnings when compared to the Lenders in the Pool, meaning that the First Loss Capital Provider and the Lenders earn the same per unit of fund. Similarly, a Staker Earn Factor value of 150% corresponds to 1.5x earning leverage.

As an example, if a First Loss Capital Provider is looking to offer an average APY of 10% to Lenders into the Pool and wants to achieve a 15% APY on their staked funds, the Staker would set the Staker Earning Factor to 150%. Besides the Staker's Earning Factor, Lender APY depends on a number of parameters such as funds borrowed, protocol fees, and stake-to-pool ratio (see Section 4.7 for more details). Any First Loss Capital Provider earnings above a leverage factor of 1x are transferred to the First Loss Capital Provider.

Lastly, the remaining interest is added to the Pool funds, resulting in a proportional increase in balances. This remaining interest includes the First Loss Capital Providers' earnings that correspond to 1x earnings leverage factor, recognising the interest that is being accrued by their first loss capital and necessary to maintain the First Loss Capital Provider's stake-to-pool ratio.

The following schematic summarises the process for splitting earnings from loan interest:

Splitting Loan Interest Earnings

The formulas for splitting the interest earnings are as follows:

Given:

$$currentStakePercent = \frac{stakedPoolTokens}{totalPoolTokens} * 100$$

Then, protocol earnings:

$$protocolFees = interestPaid * protocolEarningPercent$$

First Loss Capital Provider or Staker’s withdrawable earnings, or SWE:

$$SWE = (interestPaid - protocolFees) * currentStakePercent * (earnFactor - 1)$$

​Pool earnings:

$$poolEarnings = interestPaid - (protocolFees + MWE)$$