How does the Debt Pool work?

How does the Debt Pool work?

Dec 20, 2021 · 3 min read · cat

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As you know, users of the Linear ecosystem can easily stake LINA to build ℓUSD on Buildr, and subsequently purchase Liquids on Linear Exchange! But enough with the convenience that Linear brings, let’s dive in to understand how Linear Finance has set up its Debt Pool to bring you unlimited liquidity and more importantly a stable environment for you to pursue your financial goals!

What does ‘debt’ refer to?

Linear’s collateralized debt pool is the backbone of its protocol and is backed by the Linear token, LINA. Users who stake LINA can use Linear Buildr to build debt, which may take the form of ℓUSD or any of our synthetic Liquids that are purchased on Linear Exchange ℓUSD is also used to purchase synthetic assets (Liquids) on Linear exchange!

What is the debt pool and its purpose?

All stakers using Linear that build ℓUSD become a part of our Linear Debt Pool which serves as the counterparty to traders on the Linear Exchange. As such, when users build debt on Linear, each user’s debt position needs to be overcollateralized. The pledge ratio, or the collateralization ratio that determines how much ℓUSD debt a user can build, is currently set at 500%.

Pledge Ratio = (The value of Staked + Locked LINA) / (Value of a user’s Debt Balance)

In reality, the debt pool constantly fluctuates in value due to price changes in tracked assets or when users repay or incur more debt. As such, a user’s debt proportion also continuously changes, and users are incentivized to maintain their p-ratio to ensure the stability of the system.

Each user is responsible for covering his/her pro-rata share of the Linear Debt Pool after building debt. For example, if the total debt pool increases in value and assumes the user’s debt proportion remains constant, the user’s debt will increase in value but his p-ratio will decrease. However, users with a p-ratio below 500% will be unable to claim their weekly rewards or build ℓUSD even if they have debt that is eligible for rewards. Thus, users will need to burn ℓUSD to repay their debt or stake additional LINA to bring their p-ratio back to 500%.

Are there rewards for my contribution to the Debt Pool?

Naturally! All users with a “Debt Balance” greater than zero will accrue LINA staking rewards and a share of Linear.Exchange fees in ℓUSD. These are continuously calculated per block and are based on the percentage of debt the users have relative to the entire debt pool. That means the more debt you have, the more rewards you earn! Your rewards are based on the amount of debt you build, acting as your compensation for being a counterparty to traders on Linear.Exchange.

Linear is committed to bringing you a stable, cost-effective, and efficient DeFi protocol. Hope this quick guide into how the debt pool works has provided a better overview of the mechanisms behind Linear Finance.

About Linear Finance

Linear Finance is a cross-chain compatible, decentralized delta-one asset protocol that allows users to get synthetic exposure to various assets, including cryptocurrency, commodities, and market indices. Users can utilize our cross-chain swap functionality to instantly swap assets across leading blockchain environments and DeFi protocols with unlimited liquidity and zero slippage.

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