Native Borrowing & Leverage
Borrow rETH against $NUMA or open a leveraged long or short on $NUMA
Borrowing and leverage benefit the numa protocol and $NUMA holders since opening, closing, and liquidating positions involve vault fees and liquidation fees that increase the backing of all $NUMA tokens in circulation. These capabilities increase the utility and demand for the $NUMA token, which contributes to the overcollateralization of the outstanding synthetics. This makes the protocol safer, since the collateral increases in comparison to the synthetic debt. Additionally, in situations of stress, the protocol can protect itself by liquidating positions and rapidly become healthy again—pushing more collateral into the vault and reducing the risk in the system.
Borrowing
The numa protocol provides the ability for users to take out loans against their $NUMA holdings and borrow the backing—rETH. In the case of borrowing, opening and closing a position involves no fees and no interest in normal conditions; however, fees are collected if a position is liquidated. This allows users to maintain exposure to $NUMA while also accessing liquidity. Borrowing against your $NUMA holdings is essentially a “long” position, since users must repay their loan (rETH) to receive their collateral ($NUMA) in return. These loans are interest-free, unless the protocol must protect itself in times of stress (more on this on the protections page). Essentially, when a user takes out this loan, they are freeing up their funds and also betting that the price of $NUMA will go up against rETH.
Users can borrow up to 92% of their collateral value as a loan, and positions can become liquidatable at 95% loan-to-value (LTV); in all positions, the collateral is always valued at the vault sell price. For example, if 1 $NUMA = 0.1 rETH, a user could deposit 10 $NUMA and receive up to 0.92 rETH in return. Users can also receive any smaller amount with a lower risk of liquidation: e.g., a user could take out 0.5 rETH against 10 $NUMA and have a much lower risk of liquidation. Again, positions are liquidatable when the value of the loan becomes worth 95% of the collateral. So, if the value of the 0.92 rETH increases to 95% LTV against the 10 $NUMA collateral, then the position can be liquidated. In this case, the liquidator will receive a $100 reward for closing the position and the numa vault retains the excess collateral of approximately 5% (-$100), which increases the rETH backing of all $NUMA tokens in circulation. If a user takes out a much smaller loan in relation to their collateral, then the risk of liquidation is much lower. Let’s assume a user deposits 10 $NUMA to borrow 0.5 rETH. The 0.5 rETH would have to increase much more in value for the user to be liquidated.
Borrowing and repaying 0.5 rETH:
User deposits 10 $NUMA
User receives 0.5 rETH loan and 10 cNUMA to represent the position
When closing the position, user deposits 0.5 rETH, 10 cNUMA is burned, and user receives 10 $NUMA from the lending contract
Leverage
Users also have the option of opening leveraged long and short positions on the $NUMA token. Opening and closing leveraged positions may involve vault fees and liquidation fees that serve to increase the overcollateralization of the protocol. Leveraged positions can be opened and closed through the vault or the LP: the protocol calculates which route provides the best price to the user. As with lending, liquidations are calculated using the vault sell price. As such, if a user is opening a long position, the most advantagous time to open this position is when the LP price is close to the vault sell price. Positions that are opened when the LP price is close to the vault buy price have higher risks of liquidation and access to lower amounts of leverage. In the case that the best price involves opening or closing a position through the vault, fees are collected which inscrease the backing of all $NUMA tokens in circulation; these fees are incorporated into the LTV.
Let’s assume a user holds 10 $NUMA and wants to open a 5x long position while the LP price is close to the vault sell price, such that their resulting position size is 50 $NUMA. And let’s assume the nominal value of 1 $NUMA = 0.1 rETH, while the LP price is 0.095 rETH = 1 $NUMA. The protocol will open the position using the LP price, since it allows for lower LTV and thus a more favorable liquidation price. In this case, the LTV of the open position is 80%, and in all cases the liquidation LTV is 95%. While the long is open, it is interest-free (unless the system is under stress, more info in protections). Next, assume that the $NUMA sell price gains 10% in value against rETH, and the user closes their position in profit while the $NUMA LP price is close to the vault buy price: e.g., the nominal price is now 0.11 rETH per $NUMA, while the LP price is 0.115798 per $NUMA. The protocol will close the position using the LP price to maximize the profit for the user. Now, the user's 5x long has resulted in nearly doubling their $NUMA holdings, so their position is now 17.18 $NUMA, for a profit of 7.18 $NUMA. This example doesn't include any swapping fees or slippage calcuations, since these will vary at any given moment. And while this example refers to a long position, the same principles are true with a short position.
Opening a 5x long at the vault sell price:
User deposits 10 $NUMA
Contract flash loans 40 $NUMA
50 $NUMA added as collateral
Contract determines best route to purchase 40 $NUMA, whether through the vault or LP
Contract borrows enough rETH as required for 40 $NUMA (e.g., 3.8 rETH)
Contract repays 40 $NUMA flash loan
Contract deposits any surplus $NUMA as collateral if slippage ends up lower than expected
Contract determines LTV and liquidation price
User receives 50 cNUMA to represent their position
Closing a 5x long after a 10% increase in $NUMA against rETH at the vault buy price:
User transfers 50 cNUMA to close the position in profit
Contract flash loans 3.8 rETH to repay loan
Contract uses 32.18 cNUMA collateral to repay
3.8 rETH are returned to the vault
32.18 $NUMA are burned
User withdraws 17.18 $NUMA for a profit or 7.18 $NUMA
Liquidations
The LTV of either a loan or leveraged position determines how much prices must move for a position to become liquidatable: the larger the loan amount or the greater the leverage, the higher the risk of liquidation. In the example of the 5x leveraged long position above, the initial LTV was 80%; and as with all cases, the liquidation LTV is 95%. Consequentially, if the price of rETH increases ~18.75% against $NUMA, then the position becomes liquidatable.
As mentioned, the liquidation of this position also allows the protocol to retain a portion of the collateral. In the liquidation above, the 50 $NUMA is now worth 4 rETH, and the user owes 3.8 rETH. When the position is liquidated, the liquidator receives $100 worth of rETH, and the protocol retains the difference between the 4 rETH remaining collateral and the 3.8 rETH borrowed, minus the $100 worth of rETH paid to the liquidator.
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