Ruler incentives holders of USD stablecoins—DAI, USDC & USDT—to provide loans in the peer-to-peer marketplace through two mechanisms:
- Direct lending — By direct lending of stablecoins, a lender captures interest rate yield.
- Providing liquidity — By providing liquidity to the Ruler AMM pools that are used to facilitate loans—see Borrowing for how that works—Ruler allows the associated “LP tokens” to be staked and farmed, earning the liquidity provider yield in RULER tokens.
Let’s now look in detail at the mechanics of lending on Ruler.
To lend USD to borrowers on the Ruler platform, you can either:
- “Buy” RC tokens in the Ruler AMM pool at the current market rate, using the “Lend” feature, or
- “Mint” RC tokens on a one-to-one basis with DAI, using the “Deposit” feature.
What’s interesting, is that you’re not lending to a particular borrower, but rather interacting with the liquidity pool that’s used to fund all borrower loans.
Once a lender holds RC tokens, he or she may further be interested in farming, as described below.
Providing liquidity & farming
To provide liquidity and farm, a lender:
- Deposits stablecoins, and receive back one newly-minted RC token per USD. — Note that in contrast to the “Lend” function, the “Deposit” function provides exactly one RC token per USD. Depending on the market conditions—i.e. positive borrow interest rate—it would be advantage to use the “Lend” feature to buy, rather than mint, a higher number of RC tokens for a given amount of DAI.
- Deposit liquidity — Visit the relevant liquidity pool (linked to from Ruler website), and deposit your RC tokens into the pool. You’ll receive “LP tokens” as receipt of your deposit.
- Stake your LP tokens in the relevant farm at the Ruler website. — At this point, you’ll start earning RULER tokens, which can be claimed at any time.
Unwinding a lending position
As the current lending term gets closer to expiry, loan holders will increasingly sell their DAI back into the pool for the RC tokens they need to pair with their RR tokens for loan repayment. This should drive the price of RC tokens back towards 1 USD, such that LP providers can redeem their own RC tokens for 1 USD each.
In the case of defaulted loans, Ruler liquidity providers receive the foreited collateral. Whether this is beneficial or detrimental to LPs, depends on the price of the collateral at the time of expiry. When considering to be a Ruler LP, one must consider the risk that collateral values decline, and borrowers choose to default.
Let’s now learn how to invest in the Ruler project itself. →