Danogo Fixed Pool Lending

Introduction

The DeFi space is experiencing exponential growth but continues facing significant challenges such as market volatility and not enough reliable investment options. Fixed Rate Lending steps in to solve these issues by providing a stable and predictable financial tool for people to invest and borrow in an otherwise fluctuating ecosystem. This paper explores the compelling need for Fixed Rate Lending, how it works, and why it’s a perfect fit for Cardano blockchain to deliver sustainable financial solutions.

Fixed Rate Lending caters to:

• Investors who seek stable and predictable income.

• Borrowers who aim to secure funding without the uncertainty of fluctuating interest rates.

Market Environment & Problem

In decentralized finance (DeFi), market fluctuations significantly impact borrowing and lending rates. High volatility often leads to unpredictable floating interest rates, making it difficult for borrowers to plan their capital costs. The increasing demand for stablecoins further amplifies these fluctuations, as traders and investors seek liquidity for various DeFi strategies, including leveraged trading, liquidity provision, and yield farming.

Lack of Fixed-Income Investment Options

Currently, most DeFi lending platforms, including those on Cardano, operate with float interest rates, leaving lenders exposed to unpredictable returns. Unlike traditional finance, where fixed-income instruments such as bonds and loans with fixed term provide stable yields, DeFi lacks a robust fixed-rate lending and secondary debt market. This absence limits the ability of risk-averse investors to participate in DeFi and discourages long-term capital commitment.

Interest Rate Volatility and Its Market Limitations

Borrowing demand in DeFi remains consistently high, with stablecoins serving as a primary example due to their price stability and versatility in leveraged trading, liquidity provisioning, and arbitrage strategies. Many DeFi lending platforms operate with floating interest rates, where borrowing costs fluctuate based on market conditions. As a result, borrowers face unpredictable financing costs, especially during periods of high utilization, which may impact their borrowing decisions and make long-term planning more difficult.

A review of Liqwid Finance’s lending markets illustrates how stablecoin borrowing demand leads to high utilization rates, often exceeding 80%, which in turn drives up borrowing costs as floating interest rates adjust dynamically.

Stablecoin	Total Supply	Total Borrowed	Utilization Rate	Supply APY	Borrow APY
DJED	5.8M	5.16M	88.96%	25.14%	35.32%
iUSD	1.82M	1.57M	85.98%	23.51%	34.17%
USDM	2.02M	1.71M	84.69%	22.82%	33.68%
USDC	4.49M	3.52M	78.25%	19.56%	31.25%
USDT	1.26M	928.95K	73.14%	17.17%	29.35%

Table 1: Stablecoin Lending and Borrowing Market Information on Liqwid (on 2025-01-22)

Interest Rate Volatility in DeFi Lending Markets

DeFi lending platforms typically determine interest rates based on token demand, liquidity availability, and market activity:

• Periods of high borrowing demand lead to higher interest rates, increasing costs for borrowers.

• Liquidity shortages drive interest rate surges, particularly when lending pools approach full utilization.

• Market volatility can create unpredictable interest rate fluctuations, making it difficult for borrowers to manage long-term financing strategies.

The following yield curve chart illustrates how borrowing rates fluctuate over time in response to utilization changes and market demand:

Image 1: Yield curve of DJED per epoch

This reinforces the need for Fixed-Rate Borrowing, allowing users to secure stable borrowing costs and avoid unpredictable interest rate spikes. Additionally, a Fixed-Income Investment model can provide lenders with more stable returns, encouraging long-term capital commitment and improving overall market efficiency.

Solution

Danogo introduces a Fixed Rate Lending platform that enables borrowers to secure loans at predetermined, unchanging interest rates, and investors to earn stable returns on their capital. Unlike floating-rate lending, where rates fluctuate based on market conditions, fixed-rate lending ensures consistency for both parties, fostering financial planning and reducing risk.

This platform offers:

• More Stable Returns for Investors:

  • Suppliers can create deposit pools with a fixed maturity date that will be used to provide fixed-rate lending.

  • The platform aims to ensure that the yield for suppliers equals or exceeds the interest rate of non-maturity deposits on Liqwid (https://liqwid.finance/).
  • Each deposit pool is tokenized into principal tokens (pTokens) and yield tokens (yToken). Those tokens can be redeemed at maturity.

  • Opportunities for different Investor Profiles:

    • Market Makers: Professional traders who create pools and provide liquidity for interest rate swaps by market-making with pTokens & yTokens, creating a secondary market for fixed-income trading.

    • Stable Yield Investors: Those looking to lock in capital for a fixed, stable yield can invest and hold pTokens until maturity.

    • High-Risk Investors: Risk-tolerant traders can engage in leveraged trading of yTokens, speculating on future interest rate movements to maximize returns. This trading mechanism operates similarly to the Interest Rate Swap (IRS) Market in Traditional Finance (TradFi), where participants trade fixed and floating rates based on their market outlook.

• Stable Borrowing Costs for Borrowers:

  • Borrowers can secure fixed interest rates and fixed loan terms, shielding them from market volatility and unpredictable floating rates.

How It Works:

Danogo’s Fixed-Rate Lending and Interest Rate Swap (IRS) Market provide a structured, efficient system for lenders, borrowers, traders, and liquidity providers to interact. Participants can earn returns, hedge risks, or optimize capital through interest rate trading and fixed-term lending pools.

The four main roles in the system are:

• Market Makers – Provide liquidity, create lending pools, and facilitate price discovery in the secondary market.

• Borrowers – Secure fixed-rate loans with collateral and predictable repayment terms.

• Leveraged Traders – Trade yield tokens to speculate on interest rate movements.

• Fixed-Deposit (FD) Investors – Lock in capital for stable returns.

1. Market Makers

Role Overview

Market Makers supply liquidity by depositing assets to create Fixed-Rate Lending Pools. Market Makers will receive Principal Tokens (pToken) & Yield Tokens (yToken) for creating the pool, which can be traded on Danogo DeX, facilitating price discovery and liquidity for pToken and yToken on the secondary market.

How Fixed Rate Lending Pools work

Fixed Rate Lending Pools can be configured with key parameters as follow:

• Maturity date: The fixed term for the pool, when pToken & yToken can be redeemed.

• Accepted collaterals: The assets borrowers can use as security.

• Threshold: The maximum percentage of the collateral’s value the user can borrow..

• Fixed rate settings: The configuration defines how the fixed interest rate is calculated, including factors like maximum loan duration, interest rate gradient, and base interest rate.

Fixed Rate Lending Pools earn returns from two sources:

1. Floating interest rates generated by the liquidity supplied to Liqwid Finance. When fund is idle, not on lent out to fixed term loans, they are deposited into Liqwid to earn yield,

2. Interest paid on Fixed-Term Loans, which borrowers repay at predetermined rates.

Since the lending pool dynamically allocates liquidity between Liqwid Finance and Fixed-Term Loans, it ensures that the minimum yield for lenders will always be equal to or higher than Liqwid’s yield.

Tokenized Yield Instruments

Upon depositing, lenders receive two types of tokens representing their investment:

• pToken (Principal Token): Represents the deposited principal and can be redeemed at maturity for the principal amount.

• yToken (Yield Token): Represents the interest earnings generated over time and can be redeemed at maturity for the full yield.

Both tokens can be traded on the secondary markets to unlock liquidity or hedge risk before maturity.

Market Making Role

• Provide liquidity to the secondary market for pTokens and yTokens.

• Facilitate price discovery for interest rate swaps.

• Earn fees and arbitrage profits from trading spreads between fixed and floating rates.

By combining lending with market-making, users maximize capital efficiency while enabling a liquid and fair interest rate swap market.

2. Borrowers

Role Overview

Borrowers can access fixed-rate loans by selecting from pre-set loan options, each offering:

• Fixed loan terms (7 days, 30 days, 60 days, 90 days)

• Fixed interest rates

• Collateralized borrowing

Loan Creation Process

1. Borrowers specify the debt amount and health factor they wish to maintain.

2. The system automatically calculates the required collateral amount based on the selected loan parameters.

3. Borrowers deposit collateral and receive loan funds directly from the pool.

Collateral Management and Loan Adjustments

• Borrowers can modify their collateral at any time to enhance the health factor of their loan, reducing liquidation risk.

• ADA collateral continues to earn staking rewards and retains voting power for borrowers.

Loan Repayment

• At maturity, borrowers must repay the full debt amount, which includes:

  • The principal amount borrowed

  • The fixed interest accrued over the loan term

• Once repayment is completed, borrowers receive their collateral back in full.

Liquidity Management

• Loans are funded directly from the pool.

• If liquidity is currently supplied to Liqwid, the pool will withdraw from Liqwid and fund the loan, ensuring optimal liquidity allocation.

This structure allows borrowers to access predictable borrowing costs while maintaining capital efficiency, making fixed-rate lending a sustainable alternative to floating-rate borrowing.

3. Leveraged Traders (Speculating on Interest Rates)

Role Overview

Traders can speculate on interest rate fluctuations by trading yTokens in the Interest Rate Swap Market.

How Traders Benefit from yT Tokens

• Long yToken (Bullish on Rates): If borrowing demand rises, yToken prices increase, leading to potential profits.

• Short yToken (Bearish on Rates): If borrowing demand drops, yToken prices decrease, allowing traders to short-sell yToken.

This trading mechanism allows for interest rate speculation, yield hedging, and high-risk, high-reward opportunities in DeFi.

4. Fixed-Deposit (FD) Investors (Seeking Stable Returns)

Role Overview

Fixed-Deposit (FD) investors are risk-averse participants who prefer stable, predictable yields over speculation.

How FD Investors Earn Returns

• FD investors buy pTokens on the Danogo Bond DeX, which they hold until maturity for guaranteed fixed returns.

• Unlike leveraged traders, FD investors avoid market volatility and focus on long-term capital preservation.

This role provides an opportunity for users looking to lock in stable returns without exposure to interest rate fluctuations.

Redemption Process

At maturity, holders can redeem their pToken (Principal Token) and yToken (Yield Token) to claim their funds. The redemption process works as follows:

1. Redemption at Maturity:

   • pToken holders redeem their Principal Token for the original deposited amount.

   • yToken holders redeem their Yield Token to receive the interest earned over the loan period.

2. Funds Settlement:

   • The system automatically settles redemptions from available liquidity in the pool.

   • If liquidity was supplied to Liqwid, funds will be withdrawn from Liqwid to fulfill redemptions efficiently.

Liquidation Process

Liquidation occurs when a borrower fails to meet repayment obligations or when the value of their collateral falls below a critical threshold, making the loan undercollateralized. Danogo’s liquidation mechanism ensures risk management and capital protection for lenders.

Liquidation Triggers

There are two conditions that can trigger liquidation:

1. Failure to Repay the Loan BEFORE Maturity:

   • If a borrower does not repay the full debt amount (principal + fixed interest) by the due date, the system automatically initiates liquidation to recover lender funds.

2. Health Factor Falls Below 1 (Undercollateralization):

   • The health factor measures the collateral's strength relative to the borrowed amount.

   • If the collateral value drops due to market fluctuations, causing the health factor to fall below 1, liquidation is triggered to prevent further losses.

Process

1. Collateral Seizure

   • When liquidation is triggered, the borrower’s collateral is fully liquidated to recover the outstanding debt.

   • The collateral is transferred to liquidators, who repay the loan in exchange for discounted collateral.

   • This process ensures that debt repayment is handled efficiently, preventing bad debt from accumulating in the lending pool.

2. Debt Settlement

   • The proceeds from liquidation are used to repay the full outstanding debt, which includes:

     • The principal amount borrowed

     • The full fixed interest

   • Funds are returned to the lending pool, ensuring that liquidity providers receive their expected repayments.

3. Lender Protection

   • Liquidation ensures that lenders receive their principal and interest as expected.

   • Since loans are backed by collateral, the risk of loss is minimized for liquidity providers

Oracle and Price Feed System

Oracles play a crucial role in Danogo’s platform that ensures accurate price data for assets and for determining fair interest rate swaps.

How Danogo Uses Oracles

1. Collateral Valuation & Health Factor Calculation

• Danogo uses Oracles to fetch current market prices for collateral assets and borrowing assets to determine the health factor of a loan.

• This ensures borrowers always meet collateralization requirements, reducing undercollateralization risks.

1. Liquidation Triggers

• Oracles are used to check if an asset’s price falls below a certain threshold, the system automatically checks the health factor and initiates liquidation when necessary.

• This prevents bad debt accumulation while ensuring a fair liquidation process for borrowers and lenders.

1. Interest Rate Determination

• Danogo Fixed Lending Pools uses On-chain Yield Data of Liqwid Finance to calculate market-based fixed rates for loans.

• This data is also used to determine the values of funds supplied to Liqwid that ensures accurate interest calculation for Fixed Rate Lending Pools and the pricing of yTokens.

Oracle Integration

Danogo currently integrates with Orfax and Liqwid for price accuracy, reliability, and decentralized data sourcing. Additionally, support for Djed, Indigo Protocol, and Charli3 will be implemented based on the required price feeds for specific token pairs, ensuring comprehensive oracle coverage while minimizing the risk of single-source failure.

Risk Management

Danogo has implemented multiple layers of risk mitigation strategies to ensure the security and stability of the platform. Below are key risks and the measures taken to mitigate them.

1. Danogo Smart Contract Hack Risk

• Risk

  • As a DeFi protocol, Danogo relies on Smart Contracts to facilitate all operations

  • Vulnerabilities in Smart Contracts could lead to exploits, fund losses, or unexpected protocol failures.

• Mitigation

  • Danogo’s smart contracts are audited by reputable firms to identify and mitigate vulnerabilities.

  • All smart contracts are open-source that allows the community to verify their security.

2. Liqwid Smart Contract Hack Risk

• Risk

  • Danogo integrates with Liqwid Finance to generate yield for idled funds.

  • If Liqwid’s smart contracts are compromised, it may impact funds supplied to Liqwid pools.

• Mitigation

  • Danogo allocates liquidity dynamically, meaning funds are not fully dependent on Liqwid.

  • If a security breach occurs, funds supplied to Liqwid can be withdrawn to fixed-rate pools, minimizing exposure.

3. Liqwid Pool Fund Dry-Up Risk

• Risk

  • Liquidity shortages in Liqwid pools could delay loan funding or redemptions.

• Mitigation

  • By default, when the funds are idle and not lent out to fixed term loans, they are deposited into Liqwid to generate yield.

  • If Liqwid pools dry up, Danogo will stop supplying additional funds to Liqwid and prioritize capital allocation to fixed-rate pools. Moreover, Liqwid’s and all float pool’s mechanisms naturally adjust borrowing rates based on utilization rate. When the pool experiences a liquidity shortage, borrowing rates increase sharply, making it more expensive for borrowers to maintain their loans. This incentivizes borrowers to repay their loans to avoid high borrowing costs, which gradually restores available liquidity.

4. Oracles Manipulation Attack Risk

• Risk

  • Danogo relies on Oracles to fetch price data

  • If an attacker manipulates oracle prices, they could exploit the system by undercollateralizing loans or triggering false liquidations

• Mitigation

  • Danogo integrates multiple Oracle’s sources to prevent single-point failures or price manipulation.

  • If a single oracle’s price deviates by more than 5% from the average price of all sources, all loan’s operations related to the price will be suspended to protect the user's fund.

5. Collateral Default Risk (Value Falls Below Loan Amount)

• Risk

  • If market volatility causes collateral prices to drop significantly, loans may become undercollateralized, leading to:

    • Liquidation inefficiencies, where collateral is insufficient to cover the loan.

    • Lender losses, if liquidations fail to recover the full borrowed amount.

• Mitigation

  • Over-Collateralization:

    • Loans are always over-collateralized, ensuring that loans are backed by assets exceeding the borrowed amount.

    • This acts as a buffer against market volatility that reduces the risk of undercollateralized defaults.

  • Liquidation Safeguards

    • Automated liquidation process ensures that undercollateralized loans are quickly settled to protect lenders.

    • Liquidators are incentivized to repay defaulted loans in exchange for discounted collateral, keeping markets efficient.

Disclaimer & Risk Disclosure

This litepaper is for informational purposes only and does not constitute financial, legal, or investment advice. Participation in Danogo’s Fixed-Rate Lending platform involves risks, including but not limited to market volatility, regulatory uncertainties, and potential smart contract vulnerabilities

Danogo does not guarantee fixed returns or risk-free investments, as all transactions are subject to market conditions, borrower defaults, and liquidity risks. Users should conduct their own due diligence and consult with qualified financial or legal advisors before engaging with the platform.

By participating in Danogo’s ecosystem, users acknowledge and accept the inherent risks of decentralized finance (DeFi) and blockchain technology. Danogo shall not be held liable for any losses, damages, or disruptions resulting from the use of the platform or its associated services.