# Borrowing

### **Why would I use AstridDAO for borrowing?**

AstridDAO offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan). Instead of selling collateral assets (e.g. ASTR, ETH, and etc.) to have liquid funds, you can use the protocol to lock up your collateral asset, borrow against the collateral to withdraw BAI, and then repay your loan at a future date.&#x20;

Using ETH as an example for the collateral asset: Borrowers speculating on future Ether price increases can use the protocol to leverage their Ether positions up to multiple times, increasing their exposure to price changes. This is possible because BAI can be borrowed against Ether, sold on the open market to purchase more Ether — rinse and repeat.\*&#x20;

\*_Note: This is not a recommendation for how to use AstridDAO. Leverage can be risky and should be used only by those with experience._&#x20;

### **What do you mean by collateral?**

Collateral is any asset which a borrower must provide to take out a loan, acting as a security for the debt.

### Is Astar (ASTR) the only collateral accepted by AstridDAO?&#x20;

Currently, AstridDAO would support ASTR as the single collateral, and would expand to other collaterals. See [timeline](timeline) for more details.

### **How can the protocol offer interest-free borrowing?**

The protocol charges one-time borrowing and redemption fees that algorithmically adjust based on the last redemption time. For example: If more redemptions are happening (which means BAI is likely trading at less than 1 USD), the borrowing fee would continue to increase, discouraging borrowing.

Other systems (e.g. MakerDAO) require variable interest rates to make borrowing more or less favorable, but do so implicitly since borrowers would not feel the impact upfront. Given that this also needs to be managed via governance, AstridDAO instead opts for a fully decentralized and direct feedback mechanism via one-off fees.

### **How can I borrow with AstridDAO?**

To borrow you must open a Vault and deposit a certain amount of collateral (e.g. ASTR) to it. Then you can draw BAI up to a collateral ratio of `minimum collateral ratio`. A **minimum debt** of `100 BAI` is required.

### **What is a Vault?**

A Vault is where you take out and maintain your loan. Each Vault is linked to an Astar address and each address can have just one Vault.

Vaults maintain two balances: one is an asset (e.g. ASTR) acting as collateral and the other is a debt denominated in BAI. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Vault's collateral ratio changes accordingly.

You can close your Vault at any time by fully paying off your debt.

### **Do I have to pay fees as a borrower?**

Every time you draw BAI from your Vault, a one-off borrowing fee is charged on the drawn amount and added to your debt. Please note that the borrowing fee is variable (and determined algorithmically) and has a minimum value of `0.5%` under normal operation. The fee is `0%` during [Recovery Mode](recovery-mode). \
\
A `10 BAI` [Liquidation Reserve](#what-is-the-liquidation-reserve) charge will be applied as well, but returned to you upon repayment of debt.&#x20;

### **How is the borrowing fee calculated?**

The borrowing fee is added to the debt of the Vault and is given by a `baseRate` . The fee rate is confined to a range between `0.5%` and `5%` and is multiplied by the amount of liquidity drawn by the borrower.

For example: The borrowing fee stands at `0.5%` and the borrower wants to receive `4,000 BAI` to their wallet. Being charged a borrowing fee of `20.00 BAI`, the borrower will incur a debt of`4,030 BAI` after the Liquidation Reserve and issuance fee are added.&#x20;

### **When do I need to pay my loan back?**

Loans issued by the protocol do not have a repayment schedule. You can leave your Vault open and repay your debt any time, as long as you maintain a collateral ratio above the minimum collateral ratio for the corresponding asset.

### What is the collateral ratio?

This is the ratio between the Dollar value of the collateral in your Vault and its debt in BAI. The collateral ratio of your Vault will fluctuate over time as the price of the collateral asset changes. You can influence the ratio by adjusting your Vault's collateral and/or debt — i.e. adding more collateral or paying off some of your debt.&#x20;

Taking ETH as a collateral example: Let’s say the current price of ETH is `$3,000` and you decide to deposit `10 ETH`. If you borrow `10,000 BAI`, then the collateral ratio for your Vault would be `300%`.

$$\frac{10 ETH \ * \ $3000}{10000 \ BAI} * 100\% = 300\%$$

If you instead took out `25,000 BAI` that would put your ratio at `120%`.&#x20;

### **What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?**

The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode). This is a protocol parameter that is set differently for different asset (i.e. `110%` for ETH). So if your Vault has a debt `10,000 BAI`, you would need at least `$11,000` worth of ETH posted as collateral to avoid being liquidated.

To avoid liquidation during [Recovery Mode](recovery-mode), it is recommended to keep ratio comfortably above `30% or 40%` + minimum collateral ratio (e.g. `150%` for ETH).

### Minimum collateral ratio by cryptocurrency?

ASTR - **130%**\
DOT - **115%**\
BUSD, DAI and USDC - **102%**

### **What happens if my Vault is liquidated?**

You lose your collateral as your debt is paid off through [liquidation](../instant-liquidation-and-stability-pool#what-is-liquidation), i.e. you will _no longer_ be able to retrieve your collateral by repaying your debt. Taking ETH and MCR=`110%` as an example, a liquidation would result in a net loss of `9.09% (= 100% * 10 / 110)` of your collateral’s Dollar value.

### **What is the Liquidation Reserve?**

When you open a Vault and draw a loan, `10 BAI` is set aside as a way to compensate gas costs for the transaction sender in the event your Vault being liquidated. The Liquidation Reserve is fully refundable if your Vault is not liquidated, and is given back to you when you close your Vault by repaying your debt. The Liquidation Reserve counts as debt and is taken into account for the calculation of a Vault's collateral ratio, slightly increasing the actual collateral requirements.

### How can you offer a low collateral ratio?

By making liquidation instantaneous and more efficient, AstridDAO needs less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.

### **How can I take advantage of leverage?**

You can sell the borrowed BAI on the market for the corresponding asset and use the latter to top up the collateral of your Vault. That allows you to draw and sell more BAI, and by repeating the process you can reach the desired leverage ratio.&#x20;

Assuming perfect price stability (`1 BAI = $1`), the maximum achievable leverage ratio is `11x` for an asset with `MCR = 110%`.  It is given by the formula:&#x20;

maximum leverage ratio =$$\frac{MCR}{(MCR - 100\%)}$$where MCR is the [Minimum Collateral Ratio](#what-is-the-minimum-collateral-ratio-mcr-and-the-recommended-collateral-ratio).

### **Why did the collateral and debt of my Vault increase without my intervention?**

If Vaults are liquidated and the Stability Pool is empty (or gets emptied due to the liquidation), every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process.
