The problem of bad debt handling has always been one of the most thorny problems faced by all DeFi protocols. Traditional finance such as banks often adopt a method of handling bad debts that cannot be handled by the government. At present, DeFi protocols often use the form of third-party arbitrageurs to deal with conventional bad debts, but they are still at a loss as to how to deal with bad debts when the "black swan event" occurs. With the help of the concept of asset securitization in traditional finance, the Apricot team launched its own bad debt processing special token COT to contribute its own wisdom to the solution of this problem.
The main function of COT is just like the name of its special token for bad debt processing. The main purpose of its birth is to complete the liquidation commitment of the platform within 2 hours. The platform purchases this part of assets at a discounted price, and at the same time regards this part of assets as the underlying assets to issue COT. The idea is similar to traditional financial asset securitization. The platform will comprehensively consider the cumulative amount of bad debts and the market environment at the time of issuance.
Referring to the historical experience of platforms such as Compound, the increase in COT underlying assets is often the case when the collateral price of the entire platform falls. In this case, if the COT issuance committee considers that the market environment is a short-term correction, it will issue COT to Share the short-term risk of the platform; if it is judged that the callback cycle of the entire market is relatively long-term in this case, then for the purpose of protecting investors, COT will not be issued in the short term, and the platform will be more inclined to issue COT in the second The secondary market will cash out the recovered collateral to avoid systemic risks in the platform ecology, and the issuance of COT will also be delayed.
In the early stage of the cold start of the platform, taking into account the actual number of users, we simulated the amount of liquidation when Compound faced a "black swan event", and currently determined the reserve amount to be 1% of the locked amount. In terms of the source of the reserve, there are two main paths, one is to take it from the platform’s initial startup tokens; the other is to take it from the tokens that motivate users. However, the team believes that because the user base will not be too large at the beginning, there will not be many bad debts to be dealt with, so the circulation of this part of tokens will not have a significant impact on the fundamentals of the entire circulation.
At the same time, as a relatively innovative product, COT has a greater correlation between the expected transaction volume and the number of bad debts generated on the platform. Its attractiveness to investors mainly lies in:
Platforms such as Compound rely on professional arbitrageurs to deal with bad debts. The arbitrage process requires strong professional capabilities. The introduction of COT enables ordinary investors to participate in the purchase of bad debts in a very simple way, so as to be able to share in bad debts. income.
Investors who bought COT played a very important role in the development and contribution of the community ecology because they helped the community deal with the bad debt problem. As a reward, users holding COT will have greater voting rights when participating in community governance.
Overall, we believe that COT should be an important part of the platform ecology. The use of COT makes the platform’s two-hour liquidation commitment have a specific realization path, but COT, as a bad debt processing token, has certain particularities, so the platform will use COT The asset pool of COT is independent from other asset pools to ensure that in extreme cases, changes in the value of COT will not have a systematic impact on the platform ecology. The benefits of COT to the platform ecology make the DeFi ecology of the platform more complete. At present, the mainstream DeFi platforms have not reached a long-term mechanism in line with public expectations in the handling of bad debts, which has restricted the development of the DeFi ecology. Most start-up projects are facing This problem was also chosen to avoid the attitude, and the introduction of COT put forward a solution to this problem.
In the next article, we will continue to introduce how the platform guarantees the liquidity of COT, as well as the platform's detailed interpretation of the possible risks of COT (such as the decline of the underlying assets, the occurrence of a run, etc.), please continue to pay attention.
