Introducing Cruise.fi: A New Pioneer in Non-Liquidation Lending
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Introducing Cruise.fi: A New Pioneer in Non-Liquidation Lending
By eliminating liquidations, Cruise.fi has the potential to completely transform the risk profile of DeFi borrowing.
Navigating Web3 tides with focused insightsWritten by: ValHolla
Compiled by: TechFlow
Here’s a controversial take: liquidations break DeFi.
Under current system designs, sharp price drops trigger a "chain of liquidations," forcing underwater DeFi borrowers to sell at the bottom. This causes massive price volatility, scares away significant external investment, leads to network congestion during panic periods, and forces borrowers to pay exorbitant fees. DeFi would be better off if none of this happened.
Cruise.fi's mission is to solve these issues with a new no-liquidation lending protocol.
The core idea is this: instead of being fully liquidated when collateral prices fall below an arbitrary threshold, positions are gradually restored using a new type of yield derivative. Lenders who fund the system can maintain stable positions even as their lent value depreciates, earning enhanced returns from the gradual recovery of collateral rather than getting dumped in fire sales.
This is a novel design we’ll explain in detail below. If it works, you’ll no longer need to constantly monitor your borrowing position or limit your potential loan-to-value (LTV) ratio.
So let’s dive in: how can we eliminate liquidations from DeFi?
The Mechanism of No-Liquidation Lending
In traditional borrower liquidation models, users suffer massive losses when prices drop below their liquidation threshold. Cruise.fi replaces this with a system where collateral is gradually sold off when LTV becomes too high, giving time to restore debt balance.
Here's how it works.
For borrowers: Users deposit ETH as collateral and mint a native stablecoin called USDx. There is a liquidity pool for USDx on Uniswap, where they can exchange it for USDC. This effectively functions like borrowing USDC against ETH, though using USDx offers certain advantages.
Normally, such ETH-backed loans have a liquidation threshold—fall below it, and borrowers lose their ETH. But now, each position has a threshold; when prices drop below it, their collateral is gradually sold. This gives borrowers ample time to add more collateral, repay debt, or simply wait for prices to recover.
For lenders: The "lenders" are actually liquidity providers (LPs) in the USDC-USDx pool on Uniswap. They earn swap fees from the pool and then lock their LP tokens in the protocol to receive Harvest fees and staked ETH yields from borrowers’ collateral.
In a no-liquidation system, borrowers may sometimes carry undercollateralized outstanding positions. This is accounted for in several ways. First, even when underwater, borrowers continue paying staking yields to lenders, establishing a baseline income. Second, when LTV exceeds 100%, the protocol issues lenders a new type of yield derivative—the Price Recovery Token (PRT).
These two mechanisms create incentives for USDC-USDx LPs, compensating them for the risks they bear. But how exactly do they work?
Below, we'll go into detail about PRTs and the Harvesting mechanism that maintains USDx pricing stability.
Price Recovery Tokens (PRTs): A Novel DeFi Asset
PRTs are yield-bearing derivatives entitling holders to a share when collateral prices recover to a certain level. You can think of them as quasi-call options with strike prices slightly above the borrower’s liquidation threshold. If that sounds confusing, consider this example:
A borrower uses stETH as collateral with a liquidation price of $1,400. Suddenly, some FUD spreads, causing the price to drop below $1,400 within minutes.
Instead of losing their entire collateral position, the borrower’s collateral remains frozen in the protocol, and lenders receive redeemable PRTs if/when the price recovers above the liquidation threshold.
Meanwhile, lenders continue earning yield from the borrower’s frozen stETH.
Given cryptocurrency history, it’s safe to say that “blue-chip” assets like BTC and ETH eventually recover from flash crashes and reach new highs. In fact, based on around 800 liquidations on Liquity, approximately 70% of prices later rebounded to their liquidation price plus an additional 50%!
Thus, Cruise.fi’s anti-liquidation mechanism essentially saves users from losing loan assets worth more than their collateral. Instead, they receive temporary IOUs in the form of PRTs, which can later be redeemed back into ETH collateral.
As mentioned earlier, even in a more bearish scenario where ETH stays below $1,400 for months, lenders can sell their PRTs on secondary markets.
Yes, PRTs will also trade publicly.
With capital efficiency as a top priority, keeping collateral frozen indefinitely makes little sense. So if holders need capital before full price recovery, they can simply sell their PRTs and recover at least partial value.
Moreover, this creates an entirely new market enabling speculation on soon-to-be-liquidated positions. For instance, suppose an ETH position gets frozen at $2,500 and the price drops to $1,000. At that point, PRTs would be very cheap since ETH needs to rise 150% to be redeemable. However, someone looking to capitalize on this dip might buy PRTs, ideally selling them for profit before ETH rebounds to $2,500. Due to their option-like nature, PRTs offer leveraged returns compared to spot ETH.
Harvesting: Another Method to Prevent Sudden Liquidations
Like PRTs, “Harvesting” is another way to prevent sudden liquidation of collateral positions. Instead of facing 100% loss risk, a borrower’s collateral is gradually sold via Harvesting. This compensates lenders exposed to higher-LTV, riskier positions while giving borrowers response time without losing all their ETH.
In summary, both Harvesting and PRTs serve two primary functions in Cruise: mitigating bad debt and maintaining USDx’s peg to $1.
The Future of Cruise.fi
By eliminating liquidations, Cruise.fi has the potential to completely transform the risk profile of DeFi lending. It seems better for borrowers—and actually better for lenders too.
Considering that “lending” takes the form of LP positions, most people would likely prefer earning higher yields on locked stablecoins rather than having their positions closed out. On most platforms, liquidation fees go to the protocol, not the lenders, so the liquidation mechanism isn’t particularly beneficial to them anyway.
For Cruise.fi, this is just the beginning, so stay tuned—we expect plenty of news coming soon.
If everything goes according to plan, perhaps we can bid farewell to liquidations forever.
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