Algolend Lite Paper

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Table of ContentsAbstract . 3Intro . 4Lending . 4Borrowing . 6Liquidation mechanism . 9Trusted price oracle . 11Interest . 12Governance . 14IBCO . 14Protocol features . 15Conclusions . 16Lite Paper2

AbstractThe Algolend protocol designed by Blockchain Italia is an algorithmicmoney market protocol built and operated exclusively on the Algorandblockchain. It enables users to accrue interest on their deposits andborrow assets by collateralizing the deposit.By depositing funds, users would be able to start earning continuouscompounding interest immediately. The interest rates are calculated bythe protocol depending on the specific market demand.By providing funds as collateral, users would borrow any supported tokenassets at real block-time accrued interest. Silo-ed money market liquiditypools, risk-adjusted credit, health factors, and a strongly incentivizedliquidation system would all concur to ensure the protocol's economicviability.Algorand has been developed to speed up transactions and improveefficiency in response to standard blockchains' slow transaction times.Algorand, Turing Award Silvio Micali's brainchild, represents the firstpermissionless and pure proof-of-stake-based protocol. Its uniquecharacteristics of scalability, high transaction speed, fixed and lowtransaction cost, and high security make Algorand the best Layer 1solution for building decentralized financial applications as Algolend.The protocol governance has been designed to be controlled in itsmajority by the Algolend community and users. The aim is to providebenefits to all the parties involved in the protocol regarding service,earnings, and fairness.This paper aims to provide an overview of the main actors andmechanisms governing the Algolend protocol. The mathematics of theprotocol will be described in detail in the Algolend White Paper.Lite Paper3

IntroThe protocol aims to support the lending and borrowing scenariodescribed in the abstract paragraph. The following requirements andconstraints have been intentionally chosen to increase the protocolquality: Tokens representing deposits and governance tokens are realASAs (Algorand Standard Asset) and not counters associated witha contract. Operations are trustless, i.e., they do not rely as much as possibleon centralized elements trust-like.The mechanism and operation discussed in this document will be treatedas ALGO-USDC crypto pair because it is the first pool implemented in theprotocol. But the same mechanisms will apply to future integrated cryptopairs.LendingA deposit transaction allows a user to deposit a certain crypto amount and earninterest. The earned interest is paid using those interest paid by the borrowers.Deposit contracts are unique for each crypto: one deposit contract forALGO, one for USDC, etc. Each deposit contract has the ability to mintcorresponding amounts of ASA tokens to fungibly represent the depositedunderlying collateral.The ALGO deposit contract holds A-ALGO tokens, the USDC depositcontract holds A-USDC tokens, and so on.After depositing an A amount of ALGO tokens, the user receives anamount M of A-ALGO tokens according to the following formula:𝑀 𝐴/𝐼!!(1)This formula depends on the index of interest 𝐼!! for the time at which thedeposit took place.Lite Paper4

Upon withdrawal, the user returns the amount M of A-ALGO and .The ALGO lending operation structure is illustrated in the following Figure1.Figure 1 Lending operation structureThe steps illustrated in Figure 1 are the following:1. The user deposits the ALGOs, which are transferred from the useraccount to the smart contract dispenser account.2. The smart contract authorizes the transfer from the dispenser accountto the user account of the A-ALGOs representative of the depositedALGOs.Lite Paper5

BorrowingAlgorithmic lending protocols require each loan to be secured by acollateral.A user who has made an ALGO deposit and therefore holds a certainnumber of A-ALGO tokens in its account can apply for a USDC loan byplacing a part of its A-ALGO tokens as collateral to guarantee the loan.The borrowable amount Q of USDC is calculated according to thefollowing formula:𝑄 𝐴 𝑅𝑈𝑆𝐷𝐶 𝑣𝑠 𝐴𝐿𝐺𝑂(2)where R represents USDC-vs-ALGO conversion rate and A the amountof ALGO locked as collateral at borrowing time 𝑡" . The quantity Arepresents the quantity of ALGO deposited plus the interest accruedfrom the time of the deposit till the borrowing, and it is calculatedaccording to the formula:𝐴 𝑀 𝐼!"(3)where M is calculated according to (1) and represents the amount of AALGO received at the deposit time and depends on the index interest 𝐼!"for when the borrow took place.For safety factors, the total amount of Q cannot be borrowed by the user;it is necessary to keep one part as a safety factor to safeguard the loan inthe event of negative fluctuations of the ALGO value (locked as collateral)and to guarantee the interest payment.Since the R factor varies over time, two operations must be allowed:1. If the ALGO value (relative to USDC) rises, the user must be able towithdraw other USDCs as his collateral covers a higher value.2. If the ALGO value (relative to USDC) drops, the user must put otherA-ALGOs in the contract to hold the collateral value above athreshold.Lite Paper6

If the value decreases and the threshold under-collateralization arises, theliquidation mechanism takes part.Figure 2 below illustrates the structure of the USDC borrowing by lockingALGO as collateral.Figure 2 Borrowing operation structureThe steps illustrated in Figure 2 are as follows:1. The user requests a loan via the Algolend application.2. The application creates a loan account for the user. This account doesnot allow the user to utilize his/her assets which are instead governedby the TEAL logic (smart contract).Lite Paper7

3.3.1.From the user account, the necessary quantity of A-ALGO istransferred to its loan account as collateral.3.2.The borrowing request sent by the user reaches the USDClending smart contract.3.3.The smart contract checks the amount locked as collateral inthe loan account.3.4.If the control passes, the smart contract authorizes USDC loantransfer to the user account.Lite Paper8

Liquidation mechanismIn the case of the aforementioned under-collateralization, a liquidator hasthe opportunity to buy the collateral, which is under-collateralized. Toincentivize the liquidation, the collateral is sold to the liquidator for itseffective value minus a penalty fee, which represents the liquidator'srevenue.Figure 3 below illustrates the structure of the liquidation of an ALGOcollateral of a USDC loan.Figure 3 Liquidation operation structureThe steps illustrated in Figure 3 are the following:1.1.1.The liquidator requests to liquidate a loan position (buy theunder-collateralized collateral).1.2.The payment (USDC) for the collateral is transferred from theliquidator’s account to the smart contract.Lite Paper9

1.3.The A-ALGO representative of the loan collateral is sent to theliquidator’s account.2.2.1.The liquidator’s account transfers the received A-ALGO to thesmart contract.2.2.Finally, the smart contract authorizes the transfer of theundercollateralized ALGOs to the liquidator’s account.Lite Paper10

Trusted price oracleThe purpose of the price oracle is to calculate the effective exchange ratefor the price quotation. As it is an external service, the user must pay forthe oracle service.Figure 4 below illustrates the structure of protocol interaction with the priceoracle.Figure 4 Price Oracle structureThe steps illustrated in Figure 4 are as follows:1. The user sends the payment (ALGO) to the Oracle account.2. The user submits the payment proof by signing it with his/her privatekey to prove that he/she owns the payment.3. The Oracle sources the exchange rates across supported tokenpairs and sends the signed quotation to the protocol oracle account.4. The Oracle updates the quotation in the lending protocol smartcontract to allow for a subsequent borrowing operation within aspecific amount of time.Lite Paper11

InterestThe Interest index is a monotonic value that represents the interestmaturation across all protocol users. There are deposit interests andborrow interests.Borrowers pay the borrowing accrued interest on the type and amount ofthe borrowed asset until it is fully repaid. Depositors earn interest in theirdeposited assets. Algolend utilizes the interest paid by the borrowers topay the interest accrued by the depositors.Interests are calculated following the basic rules of free-market supply anddemand. This is achieved by linking the indexes to a U utilization ratioacross all the protocols' pools.To maintain protocol balance across all crypto deposits, each pool utilizesits utilization ratio U. This ratio varies between a predetermined butadjustable range that ensures stability.Figure 5 ALGO & USDC pools schemeLite Paper12

The utilization ratio is defined as the ratio between the total borrows andthe total deposits:𝑡𝑜𝑡𝑎𝑙 𝑏𝑜𝑟𝑟𝑜𝑤𝑠𝑈 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠(4)If the U value is too high, it means that the borrowing capacity of theprotocol is low. As a response, the deposit interest rate will be increased,and consequently, the borrow interest rate will be raised.On the contrary, if U value gets too low, the protocol exhibits low returnson capital, incentivizing new borrowers by lowering borrow and depositinterest rates.So, to leverage the utilization ratio, the protocol implements the followingrules:- To high U values correspond to high rates and the protocolincentives deposits.- To low U values correspond to low rates and the protocol incentivesborrows.Lite Paper13

GovernanceThe Algolend protocol governance will feature an off-chain, signaling-onlygovernance system where token holders will be given the possibility to: Put up proposals for a community vote. Vote for community and developer-sponsored proposals. Add new assets to the protocol. Add new yield strategies. Modify the risk tolerance level.In this way, ALEND (Algolend governance token ticker) can be valued asa governance token whose holders can help weigh on key parameters ofthe protocol and the overall future direction of the project.ALEND holders are responsible for helping establish and guide theprotocol's economic parameters. Moreover, Algolend incomes will bedistributed to ALEND holders.IBCOAlgolend utilizes the Initial Bonding Curve Offering (IBCO), an innovativemechanism for the public sale of the governance tokens, with the samesettlement price for all participants. IBCO prevents front-running issues ormanipulation of the token price. IBCO is used to control the price at whichthe supply of tokens is put into circulation.IBCO allows buying and selling tokens at any time during the settlementperiod. The token price increases/decreases following the mathematicsdefined in the IBCO smart contract. The Algolend team prior settles theIBCO behavior.The final price at which the ALGOLEND tokens will be distributed will bethe same for all contributors, thus eliminating the use of trading bots bymalicious actors.Lite Paper14