This is an article written by Mercurial’s community member @tiddernips to explain what Port Finance is about. If you have more questions, you can ask him and our other knowledgeable members, in our discord!
Introduction
Composability is a key factor for the success of DeFi. The seamless ability for protocols to communicate with one another and essentially leverage each other’s products is primal in further developing the vast capabilities DeFi has to offer to the world.
Port Finance is the latest DeFi application that has cemented a partnership with Mercurial to help further this development within the Solana ecosystem. Port Finance’s team brings engineering experience from major tech companies like Google, Facebook, and Microsoft, and previous contributions to Solana and Serum. All 4 core team members have a formal background in computer science from Imperial College London and Oxford University.
At the surface, Port Finance might seem like another Borrow/Lending protocol, but with time, development, and dedication, they plan to bring a variety of financial tools to the fingertips of the user. Throughout this article, I will cover topics on what Port Finance is, how to use Port, their future products, and how Mercurial fits into the picture.
What is Port Finance?
Port Finance defines itself as a Suite of Money Market Products on Solana. It is a platform where users can deposit digital assets to earn yield, borrow digital assets against their deposits, and in time a whole suite of other products such as fixed-rate lending and interest rate swaps. Port is backed by some of the biggest names in crypto including, Jump Capital, GSR, CMT Digital, DeFi Alliance, Solana Foundation, and many more!
Upon first entering Port’s application, the user is met with a very simple, clean interface. The first page the user loads into is the “Markets” page. Here, the user is able to see the variety of markets Port offers.
The top 3 boxes on the “Markets” page are metrics for the overall protocol. These include:
- Current Market Size
- Total Borrowed
- % Lent Out
- Market Composition
Current Market size is the total amount of deposits in all markets combined. Total Borrowed represents the value of digital assets that are currently being borrowed by users. % Lent Out can be calculated by taking (Total Borrowed / Current Market Size) x 100. This is the value % of borrowed digital assets against deposited digital assets. Lastly, Market Composition is a breakdown of the different markets on Port and the value each market represents within the entirety of Port.
Next, users have the choice of which market to select. Currently, Port supports markets for MER, SOL, USDC, USDT, PAI, SRM, and BTC. The user is provided with all the information needed to make the best decision when using Port.
- Deposit APY
- Borrow APY
- Utilization Rate
The Deposit APY represents the annual percentage yield for a user’s deposit in that market. For example, let us say a user deposits $10,000 of MER into a brand new Port market which has a 5% Deposit APY. This means after one year of remaining deposited in the market, a user’s $10,000 of MER will now be $10,500 of MER.
The Borrow APY is the interest on a user’s loan. If a user deposits $10,000 worth of MER and decides to borrow $1,000 USDT. With a 5% borrow APY and a $1,000 loan, after one full year of borrowing, the user will have to pay back $1,050 USDT.
Port Finance’s Deposit/Borrow APY depends on the Utilization Rate of each asset within the protocol. These metrics are variable and are subject to fluctuate depending on the demand for that specific asset on Port. The Deposit APY on Port is derived from the Borrow APY, as interest paid on borrowed assets gets distributed back to depositors. Let’s say a market has a size of $1M worth of assets. If the total amount borrowed is $100k (10% utilization) with a Borrow APY of 20%, this will generate $20k in interest. That $20k will be distributed back to the depositors, which turns into a 2% Deposit APY.
Utilization Rate is constantly fluctuating due to new capital being deposited and new loans being borrowed in specific markets. It can be calculated using the following formula.
Utilization = TotalBorrowedAmount/(TotalBorrowedAmount + LiquidityAvailable)
Step-By-Step Example on How to Deposit Collateral and Borrow
- After connecting our wallet, navigate to the “Supply” Tab on the left side of Port Finance
2. Next, locate the MER market and take note of the deposit APY, borrow APY, and Utilization Rate (details). Click the “Supply” tab on the left to access the markets.
3. Clicking the “Deposit” green arrow will prompt us to choose how much MER we wish to deposit. Click the “Deposit” button, and approve the transactions in our wallet.
4. Next, we must enable our deposit as collateral. To the left of the “Deposit” green arrow, we will see a button to switch Collateral from Off to On. This will let Port know that we wish to enable our deposits for this market as collateral for loans.
5. Congrats! You have now successfully deposited MER as collateral on Port Finance. Now let us use that collateral to borrow USDT from Port’s borrow markets.
6. Navigate to the “Borrow” tab on the left of Port Finance. (Directly underneath “Supply”).
7. Find the USDT borrow market, and select the “purple” right arrow. We are now prompted to select how much USDT we would like to borrow from Port (Keep in mind to maintain a healthy Collateralization Ratio). Approve the transactions in our wallet.
8. Congrats! We have now successfully used MER as collateral to borrow USDT! We may now use that USDT as we please.
9. After using our loan for our desired purposes, it is now time to repay our loan and withdraw our MER from Port.
10. Since we borrowed USDT from Port, we must return USDT. You can use the swap feature on Mercurial Finance to swap stables if needed! Click the “Repay” green left arrow.
11. Now we will select how much of our loan we wish to repay. For this example, we will repay our full loan amount.
12. Awesome! Now our loan is paid back in full and we are able to withdraw our MER from Port.
13. Head back to the “Supply Tab” on the left side. Find the MER market we originally deposited into and choose the red “withdraw” up arrow.
14. Choose the desired amount of MER we wish to withdraw.
15. Congratulations! We have now successfully deposited MER as collateral to borrow USDT, and we also repaid the loan and withdrew our assets from Port.
**USDT is currently in low supply on Mercurial PAI 3Pool, depositing USDT over PAI will result in more LP tokens and in time more rewards! Use your MER to help balance the pools and earn extra yield for it!
As with any loan, there are inherent risks to be cautious of before borrowing assets. A few of these are Liquidations and Collateralization Ratio. Each Borrow/Lending protocol has its own parameters for how liquidations occur and the collateralization ratio threshold one must maintain.
On Port Finance, liquidation occurs when the user’s deposited collateral value decreases too drastically, or the price of a user’s loan increases beyond the user’s deposited collateral value. Liquidation is when a user’s loan becomes too risky for the protocol and a liquidator comes in and pays off the user’s loan in return for a liquidation bonus. The liquidator is incentivized to liquidate a risky loan by receiving a bonus percentage more than what it has paid on behalf of the user that was liquidated. The liquidation threshold on Port Finance is a collateral-specific value based on the volatility and liquidity of the assets market.
The Collateralization Ratio is the next metric a user must be cautious of before taking any loan out with any DeFi protocol. It can be defined as:
Collateralization Ratio =(TotalDepositAmount/TotalBorrowAmount) x 100
This ratio represents a percentage of the value of a user’s deposited collateral against their loan. Notice how the value is >100%, this is because all loans on Port finance are over collateralized. This means a user must deposit more collateral than the value of their loan.
In time, Port Finance will add a suite of financial products a user can utilize. A few listed on the roadmap include:
- Leverage trading using Serum orderbook
- Fixed-Rate Lending
- Interest Rate Swaps
Mercurial x Port
Now, with the newest Port market, users can deposit their MER to generate extra yield, use as collateral to borrow a loan, or both! This further utility development of the MER token is the beginning of many new purposeful use cases in the works. By initiating this partnership, this will help build a relationship between the developer teams and communities to help further drive composability throughout Solana.
Yield Farmers on Solana are beginning to see an abundance of new opportunities to maximize their capital efficiency. Let’s explain an example of one such opportunity:
Alice is a new Yield Farmer on Solana and a proud holder of MER. Lately, Alice has been wondering, “What can I do with MER?”. Now, with the new MER market on Port, Alice can deposit her MER as collateral to borrow USDC or USDT. This is extremely useful because Alice is able to free up a portion of her MER’s capital without having to sell any MER! Alice can now take her borrowed USDC or USDT back to Mercurial Finance and generate even more yield on her capital! You can see how it can become increasingly beneficial for users who are looking to remain long-term holders of digital assets but don’t want their capital sitting stagnant in a wallet.
Because Port Finance is over-collateralized, the protocol will have excess capital that could be used to leverage other Solana DeFi protocols. One example would be using excess stablecoin to deposit into a Mercurial vault to generate extra yield for depositors. Port will only lend/use capital in excess that does not affect the protocol’s overall solvency.
This is just one of many scenarios that Port Finance will be able to perform with excess capital in cooperation with other DeFi Protocols. With time and growth, Port will be able to anchor itself accordingly within the Solana ecosystem, helping further push the bounds of possibilities for users. By potentially utilizing Mercurial vaults in the future, Port can help further instill that deep, concentrated liquidity that Mercurial is seeking to establish.
