In this article we will be taking a deep dive, and exploring how Outlet generates high interest rates, that you receive via our app. We will be walking you through each step of the process. Beginning in the mobile app, and ending when interest is paid. We will be following Alice as she earns interest on Outlet. Before we get started it's helpful to learn about the digital dollars we use on Outlet, known as USD Coin or USDC.

Introducing USDC (Digital Dollars)

USD Coin (USDC) is a digital representation of the US Dollar on a blockchain (In this case, the ethereum blockchain). We're working on a more in depth article that fully explains how USDC works. The short version, is that each USDC token is worth $1, just how each USD is worth $1.

In the image above, 3 USD can be converted into 3 USDC or vice versa

Step 1. Funding an Outlet Account

So first Alice goes and deposits $1000 into her Outlet account from her connected bank account via the Outlet mobile app.

Depositing Funds Via the Outlet Mobile Application

After 1 to 2 business days Alice's US Dollars (USD) arrives! Once this happens we convert the USD into USD Coin (USDC), a digital dollar. We exchange the $1000 USD for $1000 USDC via our regulated partner. The $1000 USDC can be exchanged for $1000 USD at any time. Whenever Alice withdraws from her Outlet account, USDC will be exchanged to USD. So if she withdraws $200, $200 USDC will be converted to $200 USD and then transferred to her bank. More on that later!

Step 2. Funds are Pooled by Lending Partner

Once Alice's $1000 are converted from USD to USDC, her funds are then typically pooled with other user's funds by our regulated lending partner. For this example, the total amount of money in the pool is $10,000 USDC.

As you can see in the image above, there are 5 different users (usually there are many more users, but to keep things simple we say there are only 5 in this example), who pool their funds together. The total amount of money in the pool is $10,000. As long as the entire pool is not lent to borrowers, there are funds available to allow users to withdraw. However keep in mind that if some of the funds in the pool are being lent out, not every user will be able to withdraw, until the lent money is returned to the pool.

Step 3. Funds are borrowed from the Pool

Outlet's lending partner lends user funds to various institutions and partners. In this case, they lend to some of the following:

  • Crypto Exchanges

  • Hedge Funds

  • Small Business

  • Individuals

Some loans may be over-collateralized.

What are Over Collateralized Loans?

Over Collateralized loans are loans for which you need to provide collateral that is worth more than the loan you take out. Examples of common over collateralized loans are Home Equity Loans, and Margin Trading.

As an example, let's say a small business is attempting to borrow $1000. In order to borrow funds, the business must provide at least $1200 worth of collateral. The collateral often comes in the form of something other than actual money. In the crypto world lenders often accept digital currencies, such as Bitcoin or Ethereum as collateral. We are working on an article that explains the motivations behind why anyone would take out a loan like this, and it will be available soon.

For the sake of simplicity, let's say the price of Bitcoin is $1000 per Bitcoin (BTC). Continuing with the example above, we have a business that wants to borrow $1000, but in order to borrow the $1000, the business will need to hand over $1200 (1.2 BTC), or more to secure the loan.

Over-Collateralized loans are very secure because the borrower could lose more money than they borrowed if they default (do not pay back) on the loan!

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Once the loan is secured, and funds are received by the borrower there are 3 possible scenarios:

1. Borrower pays back loan + interest before price of BTC has a chance to decrease.

In this case, everything worked out smoothly, and everyone who contributed to the pool earns a little bit of interest, while the borrower receives their 1.2BTC back.

2. Price of BTC falls to $900 per Bitcoin

Whenever the value of the collateral falls below 120% of the value of the loan, the collateral is liquidated. The loan taken out is worth $1000, while the total collateral supplied for the loan has fallen to $1080. In this case, the amount of collateral has fallen below the 120% collateral threshold. The BTC is liquidated/sold to protect the funds of the lenders.

3. Borrower never pays off their loan

The BTC is eventually liquidated, and the funds are provided back to the lenders.

In each of these cases, the lender is usually protected from loss.

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Please note that the amount of money in a pool is always changing due to the fact that there are always new loans being issued, as well as new deposits and withdrawals to and from the pool. For simplicity this example does not account for all these factors.

Step 4. Funds are used by the borrower

In this example, the borrower receives US Dollars, and then uses the funds for whatever they need. In many cases the money borrowed is used for margin trading on cryptocurrency exchanges.

Step 5. Loan Repaid

After a set time period, the loan is repaid by the borrower along with interest. The funds used for the loan are returned to the pool, along with the interest generated from this loan. As we mentioned above, our pool had initially had $10,000 in the pool. After the $1000 loan was taken, the value dropped to $9,000. After the loan was repaid the final value of the pool is $10,083.40.

$9,000 (value in the pool, after loan was taken out)

+ $1,000 (loan amount, being returned)

+ $83.40 (amount paid in interest for the loan, by the borrower @ 8.34%)

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$10,083.40 - Final value of the pool

Step 6. Interest Paid Out

Interest is then paid out to the pool. Each user receives interest for backing the loan based on the proportion contributed. In this case, Alice would receive 1/10th (since she contributed 1/10th of the funds in the pool) of the $83.40 in interest, or $8.34, for this one specific loan. This processes is done continuously throughout the year, to generate the highest interest possible.

In this article we've covered how Outlet works from start to finish. If you have any further questions feel free to reach out, or join our Discord community to further this discussion.

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