LP-0044Finallendingmorphoisolatedmarketscollateral

LP-044: Isolated Lending Markets

Abstract

Lux Lending Markets implements isolated lending pairs where each market is an independent (collateral, loan, oracle, LLTV, IRM) tuple. Unlike pooled lending (Aave/Compound), risk is isolated per market -- a bad collateral asset in one market cannot cascade to others. Each market has its own Loan-to-Value ratio, interest rate model, and liquidation parameters.

Specification

Market Creation

Anyone can create a market by specifying:


struct MarketParams {
    address loanToken;       // token being borrowed
    address collateralToken; // token used as collateral
    address oracle;          // price oracle (LP-038)
    uint256 lltv;            // liquidation loan-to-value (e.g., 86% = 8600 bps)
    address irm;             // interest rate model contract
}

Markets are permissionless. The factory deploys a minimal proxy per market.

Supply and Borrow

Supply: lenders deposit loanToken and receive shares representing their claim
Borrow: borrowers deposit collateralToken and borrow loanToken up to lltv
Interest: accrues per second, computed by the IRM based on utilization


utilization = totalBorrowed / totalSupplied
borrowRate = IRM.rate(utilization)
supplyRate = borrowRate * utilization * (1 - reserveFactor)

Interest Rate Model

The default IRM uses a kinked curve:

| Utilization | Rate |

|---|---|

| 0% - 80% (optimal) | Linear from 1% to 4% APR |

| 80% - 100% | Steep from 4% to 100% APR |

The kink at 80% incentivizes utilization to stay below optimal, ensuring withdrawal liquidity.

Liquidation

When a borrower's LTV exceeds lltv:

1. Liquidator repays part or all of the loan

2. Liquidator receives collateral at a discount (liquidation incentive = 5%)

3. Bad debt (if collateral < loan) is socialized across lenders in that market only


maxLiquidatable = borrowedAmount * (currentLTV - lltv) / (1 - lltv * (1 + incentive))

Risk Isolation

Each market is an independent contract with its own:

Reserve of loan tokens
Collateral custody
Interest accrual state
Bad debt accounting

A market with a worthless collateral token only affects lenders in that specific market.

Reserve Factor

A percentage of interest (default 10%) accrues to the protocol reserve within each market. This reserve absorbs initial bad debt before socializing to lenders.

Security Considerations

1. Oracle dependency: incorrect oracle prices lead to incorrect liquidation thresholds. Each market must use a reliable oracle feed.

2. LLTV governance: excessively high LLTV increases insolvency risk. Market creators set LLTV at creation; it cannot be changed after.

3. Dust positions: minimum borrow amounts prevent dust positions that are uneconomical to liquidate.

Reference

| Resource | Location |

|---|---|

| Lending contracts | github.com/luxfi/standard/contracts/lending/ |

| Market factory | MarketFactory.sol |

| IRM | KinkedIRM.sol |

Copyright

Licensed under the MIT License.