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Bilateral Loans

Introduction

Bilateral loans form the foundation of the Bridgesplit Protocol, enabling direct lending and borrowing between users. Lenders can create loan offers and borrowers can create loan requests with specific parameters such as interest rate, duration, and collateral requirements. When a matching counterparty accepts the offer or request, a bilateral loan is initialized, and funds are transferred between the parties. The collateral remains non-transferrable until the loan concludes, at which point it is returned to the borrower upon repayment or transferred to the lender in the event of a default.

Offers and Requests

Bilateral loans are formed when a loan offer and loan request, collectively known as orders, are matched. Orders define the terms of a loan, including payment frequency, interest rate, principal, duration, and fees. Once created, orders are listed on the Limit Creditbook (LCB) and matched by an on-chain matching engine. Borrowers and lenders can also directly accept active orders on the LCB.

When a suitable offer and request are matched, or when a borrower or lender finds an acceptable order, the borrower can initiate the loan. The protocol automatically transfers the principal to the borrower and escrows the collateral.

Terms

Term
Description
Repayment typeSimple-Interest loans have periodic interest payments with a final principal payment at maturity and Zero-Coupon loans have a single repayment that includes all interest and principal at maturity.
PrincipalThe amount of principal being lent to the borrower.
Principal assetThe currency of principal
CollateralThe minimum amounts and mints of the collateral.
APRThe annualized cost of funds over the loan term, expressed as a percentage.
DurationThe length of time of the loan contract.
Repayment frequencyThe frequency at which the borrower is required to make interest payments in a simple-interest loan.
Default typeA loan's terms may include price-based defaults (defaulting when the loan's collateralization ratio reaches the liquidation threshold) and/or payment-based defaults (defaulting when a borrower misses a specified number of repayments).
Auto-liquidation enabledFor particular collateral types, lenders can elect to enable third-party liquidators who transfer the principal to the lender in exchange for the collateral in a default.
Liquidation thresholdThe minimum ratio of collateral to debt that must be maintained by the borrower to avoid defaulting (defined only if price-based defaults are enabled).
Max outstanding paymentsThe number of outstanding interest payments allowed prior to a payment-based default (defined only if payment-based defaults are enabled).
Early payment penaltyThe interest a borrower is required to pay on early principal repayments, expressed as a percentage of the original interest expected for the repaid principal.
Late payment penaltyThe fee a borrower is required to pay on late payments, expressed as a percentage of the late repayment.
Grace periodThe amount of time after a missed payment at which it is considered late.
Principal pricing oracleAn optionally defined custom pricing oracle to calculate principal value
Collateral pricing oracleAn optionally defined custom pricing oracle to calculate collateral value

Ledgers

Initiating a loan automatically generates a repayment ledger based on the terms specified in the matched order. The ledger defines the repayment schedule and tracks repayments as they are made. The Bridgesplit Protocol uses this ledger to determine the current state of a loan.

Defaults

Price-based defaults: Similar to existing liquidation mechanics, a price-based default occurs when the value of collateral relative to the value of the principal falls below the liquidation threshold. This can happen at any point during the loan, and borrowers should monitor their health factor to ensure it doesn't get too close to zero. Borrowers can avoid liquidations by repaying principal and topping up collateral amounts. Payment-based defaults: Payment-based defaults result from a borrower missing scheduled payments in excess of the pre-determined max outstanding payments, including the maturity payment.

Oracle Agnostic Pricing

Borrowers can set up loans that price their collateral or principal using custom or arbitrary oracles, enabling pricing for assets that may be illiquid or lack third-party oracle support. Loans may also be oracle-less, with borrowers proposing terms that solely default based on missed payments or loan expiry.