How It Works
Last updated
Last updated
Two parties, F and V, are each interested in a fixed rate yield and variable rate yield, respectively.
F holds 100 USDC and expects to earn between 3-6% APR in a lending protocol. F wants to lock in a current rate of 4% because they are worried about the future rates decreasing or being too volatile for their preference. V believes the rewards from USDC will outperform the 4% mark and wants to earn that interest without having to invest 100 USDC.
Lila Finance matches these two users.
Suppose there is a USDC vault that matches fixed-rate users and variable-rate users. Lila Finance creates three vaults with 1, 3, and 6-month maturities.
Lila calculates the trailing average APR within each specified timeframe and uses that value less a spread as the fixed rate offering.
Suppose Lila finds the trailing average APR to be 4.5% and sets the interest rate at 4%.
F deposits into the vault because they prefer the 4%. F deposits their 100 USDC into Lila Finance, and Lila deposits those tokens into a yield-generating protocol. V visits Lila Finance and sees the same vaults as F did. V deposits 4 USDC into Lila Finance, and Lila deposits this into the yield-generating protocol as well.
F and V receive a tokenized receipt of their position as an NFT. Each month, Lila will claim the rewards from the lending protocol and distribute them to V. At the same time, Lila will withdraw a portion of the funds from the funds previously deposited by V and distribute them to F. Thus, V receives a variable yield that could be more or less than 4% annualized whereas F receives a fixed income of 4%.
If F or V wants to exit their position early, they list the NFT on a secondary market, where another user will buy the position at a price accounting for payments already made, the current interest rates, and the time until maturity. This information will be held in the metadata of the NFT so users can determine a price.
Upon maturity, all payments will be made to F, and V. Lila will withdraw F's 100 USDC from the lending protocol and allow F to reclaim their collateral with their NFT. Then, F and V's NFTs represent a completed position and have no intrinsic value.
