I get asked quite often how zero-interest self-borrowing works within the Sweetbridge protocols, or more specifically: How do I get free loans with Sweetcoin?

This is why I thought this post would be interesting to all those contemplating buying Sweetcoin (SWC), or who simply are curious about the economics of Sweetbridge.

The formula

For those who know how the vault and UOU system work (it’s in the white paper after all) here is a simple description:

My Activated SweetCoins = ASW

My interest for the next month = UMF (User Monthly Fees)

Total monthly interests = TMF (Total Monthly Fees)

Total Activated SweetCoin = TAS In order to get a 100% discount this equation must be true

ASW = TAS / TMF * UMF

The long version

The liquidity protocol from Sweetbridge works like this:

Given that you put some crypto asset in a vault, you can generate a certain amount of Bridgecoins (the conversion rate. e.g 50% for ETH) which can be sold for fiat currency on the open market.

The Sweetbridge network will charge you fees on your loan, allowing it to cover the risk of your asset losing so much value that it would become unattractive for you to repay the loan.

In order to reduce the interest rate charged, you can lock up some Sweetcoins with your crypto assets. The subject of this article is to discover how much Sweetcoin is required to get a 0% loan.

Total Monthly Fees

At any given time there is a certain amount of outstanding loans on the network. Each loan is subject to a certain interest. The total fees are calculated based on the interest and disregarding the discount. The amount of activated SweetCoin has no effect on the Total Monthly Fees in the above formula.

Given all outstanding loans total 1'000'000 Bridgecoin (BRG), and the annual interest rate is 6%, the monthly fees are 1'000'000 * 6% / 12 = 5'000

Sum of all activated Sweetcoins

Given that not everyone will have Sweetcoin (SWC) to get a free loan, the amount of SWC activated in vaults is pretty much random.

Lets assume that for the 1'000'000 BRG mentioned in the previous section there are 1'000 SWC activated for fee reduction.

Example

Now that we have defined what the components mean, lets make an example.

Given that I lock up 3 ETH worth 800 USD each and 1 SWC how much will I have to pay for my loan of 1'000 USD?

The fees for one month interest at 6% for 1'000 BRC = 5 BRC

1'000 / 5'000 = 0.2 * 5 = 1

This means that my single SWC is enough to grant me a free loan

But what if I need 2'000 USD? I have the 5 ETH required for the collateral but the 1 SWC is all I have. How much will it cost me?

The fees for one month interest at 6% for 1'000 BRC = 10 BRC

1'000 / 5'000 = 0.2 * 5 = 2

Because I only activated 50% of the required SWC, I will get a 50% discount.

Can I get a loan below 0%?

What if, in the example above, I activated 5 SWC to reduce the fee? Will the fee go negative?

Theoretically, if the activated SWC were bigger than the amount required to get a 100% discount, then the fee would be below 0. This is currently not allowed, so the reduction floor is set at 0. This network behavior might change in the future.

Conclusion

Now you know what we mean when we say 0% interest loans. And you can compute how much a SWC is worth to you, based on the published network interest rates at the time.

The nice thing about this formula is that SWC should have intrinsic value as the system gets more participants, as not all of them will use SWC. Indeed, the bigger the difference between the fees and the number of SWC, the smaller the required amount in SWC becomes to get a 0% loan. This always ensures SWC is more valuable to members who want to use it to gain the discount, than individuals who want to buy it as an investment.