Everything you need to know before using Ether as collateral to borrow sUSD
One of the items in today's Fomalhaut release is the trial of Ether as staked collateral to borrow sUSD, rather than sETH in the previous trial. The advantages of borrowing sUSD over sETH is that borrowers are no longer effectively shorting ETH, and it supplies more sUSD liquidity to the DeFi ecosystem, as it has recently been in high demand.
The other benefits to the protocol for successfully integrating Ether as collateral include safety, scalability, and user onboarding — allowing ETH holders access to Synths without letting go of their Ether is an important user experience in increasing trading volume. As per the previous Ether collateral trial, ETH stakers do not receive trading fees nor inflationary SNX rewards, and any interest rate paid by ETH stakers goes to SNX stakers.
To take out a loan against your ETH, visit the 'Loans' tab in Synthetix.Exchange, and make sure to toggle 'sUSD' instead of sETH.
This is a trial with a 10m sUSD ceiling and a liquidation deadline of three months, which means that after three months the contract it can be configured via SCCP for ETH stakers to be liquidated to close out the trial period. For more details see the "Liquidation possibility" section below.
sUSD loan fees
The initial interest rate is 0%, but at some point during the trial it may be increased via SCCP. This annualised interest rate is paid in sUSD at the time of closing the loan and sent to the feePool, which is distributed to SNX stakers.
The initial minting fee is 0%, but at some point during the trial it may be increased via SCCP. This minting fee is paid in sUSD at the time of opening the loan and sent to the feePool, which is distributed to SNX stakers.
Liquidation possibility — funds at risk
As the loan is denominated in sUSD, it is necessary to introduce a liquidation mechanism for loans that fall below the liquidation ratio determined by the ETH-USD value of the collateral. The default liquidation ratio for ETH collateral is 150%, which requires a minimum of $1.50 of ETH collateral value for every $1 of sUSD borrowed.
Liquidators can liquidate a loan when the collateral value drops below the liquidation ratio.
The liquidation penalty is payable to liquidators out of the collateral value. For example, when a loan of $1000 is liquidated, the liquidator will receive $1000 * 1.10 = $1100 worth of the underlying collateral.
The remaining collateral can be withdrawn by the loan creator after the loan has been liquidated.