How Precept works

Precept lets people lend an asset and earn interest, or borrow an asset against collateral. No company holds the funds. Soroban smart contracts on Stellar hold them and apply the rules. This page starts with the basics, then gives the detail with links to the code.

The basics

Markets and reserves

A market is an isolated group of assets with its own rules. Each asset in a market is a reserve. For example, a market can have a USDC reserve to lend and borrow, and an XLM reserve to post as collateral.

A market's rules are set before it goes live. They include which assets it accepts, how much can be borrowed against each one, and which price feed it uses. After launch, these rules are fixed.

Lending

1. You deposit an asset into a reserve.
2. Borrowers pay interest on what they borrow from that reserve.
3. Your position grows as that interest accrues. There is nothing to claim.
4. You withdraw when the reserve has unborrowed cash.

The interest rate follows how much of the reserve is lent out, which is called utilization. Rates rise as utilization rises. That encourages borrowers to repay and new lenders to deposit.

Borrowing

1. You deposit collateral.
2. You borrow up to a limit set by the collateral's value and its collateral factor.
3. Interest adds to your debt over time.
4. You repay the debt and withdraw your collateral.

Your health factor compares your collateral with your debt. Below 1.0, your position can be liquidated.

Prices

Each market reads prices from an oracle. Precept's proxy oracle collects prices from configured sources and publishes their median. If no acceptable price is available, actions that need one stop, because the market will not use a bad price.

Liquidation

Nothing happens automatically when a price moves. Anyone can open an auction on a position below 1.0. A liquidator then repays some of the debt and receives some of the collateral at a discount. The discount grows over about 35 minutes until someone fills the auction.

When collateral does not cover a loan

If the collateral runs out before the debt is repaid, the remaining debt is written off against that reserve's lenders. Each lender in the reserve loses the same percentage. No insurance fund covers the loss, and lenders in other reserves are not affected.

Who can change a market

Almost nobody. The market admin can pause or freeze a market, switch a reserve off after a one-week delay, and hand over the admin role. The admin cannot move your funds. Separate oracle governance can change how a market is priced. Risks lists every lever.

Market contracts

Each market is its own contract with its own reserve list and its own admin. A market references a backstop contract and a factory, but a loss in one market never reaches the lenders of another: every loss is settled inside the reserve it came from.

How Precept handles a shortfall

Precept has no first-loss reserve. It does not use a backstop to fund a liquidation or take on bad debt, it does not auction market assets to raise a shortfall, and no share of interest funds a reserve.

• No backstop funding, no backstop insurance. The backstop's reward distribution and its emissions claim are trapped, and no reachable market path asks it for money: the code that would draw on it or pay it sits behind auction types that can no longer be created. Which assets a backstop can ever hold is fixed once, by the constructor of the backstop and its token. The backstop is plumbing, not protection.
• Only user-liquidation auctions. Interest and bad-debt auctions cannot be created or filled.
• No split with the backstop. The backstop's share of interest (bstop_rate) must be 0 when a market is deployed, and gulp no longer accrues reserve funds to it: it returns 0 and only burns market-owned positions once a reserve carries no debt. Interest accrues from the elapsed time since a reserve last accrued, and reaches lenders through the b-dollar rate.
• Losses go to the reserve's lenders. When a defaulted position cannot be repaid out of the defaulted user's own assets, the remaining debt is written off against the b-dollar exchange rate of that same reserve. Lenders of other reserves are untouched.

The rest of this site covers the interest curve and how a liquidation auction is priced.

Read more

• Lending economics: health checks, auctions, loss settlement and oracle behaviour.
• Risks: what can cost you money and every lever anyone holds.
• Code references: the code behind these pages.