Guide: money markets (money-market)

This guide explains lending and borrowing on a money market to someone who has never done either: what supplying earns, what borrowing costs, what collateral is for, and how you get liquidated. It ends with how a mandate bounds an agent that lends or borrows. The money-market profile is the normative text; when this guide and the profile disagree, the profile is right.

It builds one idea at a time, on the example the other guides use: you have $1,000, and SPCX trades at $100. The SPCX reserve here is illustrative: its limits are Kamino's SOL reserve's at the time of writing, and the rate curve Kamino's USDC reserve's. The Kamino venue profile names the real reserves.

1. What a money market is

A money market is a set of pools, one per asset: a USDC pool, a SOL pool, an SPCX pool. Anyone can supply an asset to its pool, and earn interest on it. Anyone with enough collateral can borrow from a pool, and pay interest. No one is matched with anyone: the pool lends to every borrower at once, and every lender shares what they pay.

On Kamino, the pools are called reserves, and a set of reserves that back each other is a lending market.

1.1. Supplying

You supply your $1,000 to the USDC pool.

You can withdraw it whenever the pool has the USDC to give back. It usually does, but not always: when nearly everything is lent out, you wait.

1.2. Borrowing

Now say your $1,000 is in SPCX: you hold 10 SPCX, and want dollars without selling them. You supply the 10 SPCX as collateral, and borrow USDC against them.

The buffer that matters is between your LTV and the liquidation LTV, not the max LTV: the max LTV only stops you borrowing more.

1.3. As SPCX moves

Your debt is in dollars, and your collateral in SPCX, so SPCX's price moves your LTV:

Health is the liquidation LTV over your LTV: 1.60 means the debt could grow, or the collateral fall, by a factor of 1.6 before liquidation. At 1, the venue may liquidate.

LTV               = debt ÷ collateral value
health            = liquidation LTV ÷ LTV
liquidation price = debt ÷ (units of collateral × liquidation LTV)
                  = $500 ÷ (10 × 80%) = $62.50

2. What the rates depend on

A pool's rates follow its utilization: how much of what's supplied is lent out. Borrowers pay more as the pool runs low, which brings in lenders and sends borrowers to repay. Lenders earn what borrowers pay, spread over everything supplied, less the venue's share:

utilization = borrowed ÷ supplied
supply rate = borrow rate × utilization × (1 − the venue's share)

Kamino's USDC rates rise slowly up to a kink, then steeply: at 95% utilization borrowers pay 5.51% a year, and at 100% they pay 36.34%. The pool sits around 82% today. Kamino's app shows slightly different figures, because it compounds the rates and measures utilization its own way; the shape is the same.

Rates move every time anyone supplies, borrows, repays or withdraws. A borrow that costs 5% today can cost 20% next week, and the debt grows at whatever the rate is.

3. Liquidation

Once your LTV reaches the liquidation LTV, anyone may liquidate you: repay part of your debt, and take collateral worth a little more than what they repaid. The extra is the liquidation bonus, which pays them for doing it. On Kamino, each liquidation repays at most 20% of the debt, and the bonus starts at the reserve's minimum (1%) and grows with how far past the line you are, up to its maximum (10%).

At SPCX $62.50, your first trade is liquidatable:

The first round brings your LTV back under 80%, and stops. If SPCX keeps falling, more rounds follow, each taking a bonus. Unlike a perp's liquidation, it's partial: you keep what's left, and you can stop it by repaying or adding collateral. Past 95% LTV, Kamino can liquidate everything at once.

4. Borrowing to short

A money market is also how to bet on a fall with spot: supply USDC as collateral, borrow SPCX, and sell it. If SPCX falls, you buy it back cheaper and repay. It's a short like a perp's, with two differences: you pay the SPCX pool's borrow rate instead of funding, and the liquidation is partial instead of total.

5. Parameters

6. Risks

7. When to use it, and when not to

8. Money markets under a mandate

The mandate covers money markets with three numbers:

• The position is what you've supplied minus what you've borrowed, in the reserve's asset: +1,000 USDC for your supply, −500 USDC for your borrow.
• max_position and min_position bound it. min_position: 0 on a reserve means the agent may supply it, but never borrow it; a negative min_position is the largest borrow allowed.
• min_health keeps every borrow a margin above the venue's line: at min_health: 1.25, your $500 borrow breaks the mandate once SPCX falls below $78.13, long before the venue could liquidate it at $62.50.

9. Check yourself

Three questions for each idea, all on SPCX at $100 and USDC. Work each one out on the ticket first (collateral, debt, LTV, liquidation LTV), then open the answer.

9.1. Supplying and borrowing

9.2. LTV and health

9.3. Rates and liquidation

9.4. The mandate

10. Glossary

Every term this guide uses is in the glossary. In the text, an underlined term shows its definition when you hover it or tap it.