Prices of the Tokens in Collar
A basic guide for borrowers and lenders.
The prices of the CALL and COLL tokens in Collar can be easily understood by remembering their functions (first read Introducing Collar). For concreteness, let’s continue using the example from the introduction. This article will only cover the case in which the underlying assets both remain pegged. The other case will be covered in a follow-up article.
As a Borrower
We are supposing that you have deposited USDC into the Collar pool in order to borrow USDT and have received both CALL tokens (calUSDC) and COLL tokens (colUSDC). Both tokens have an expiry time that specify the duration of the loan. Keep in mind that we’re assuming that USDT and USDC both remain pegged.
The CALL token gives you the right to claim your deposited USDC any time before the expiry time. It acts as insurance against de-pegging and has a low price in comparison to the underlying asset (in this case, USDC), and its price decreases over time until reaching 0 at the expiry time:
The fact that the CALL token’s price goes to 0 at expiry time is obvious because it has no function after the expiry time. Before the expiry time it could be sold for extra profit if you do not plan on repaying the loan, but you may be unlikely to find a buyer since the liquidity in Collar is being provided for asset/COLL pairs.
What about the COLL tokens? Obviously, 1 colUSDC should have a price less than 1 USDT, because this price difference is the money the lender is earning as interest. But it’s important to remember that 1 colUSDC will be redeemable for 1 USDC at the expiry time, so its price in USDT will increase over time, and ultimately be worth 1 USDC/1 USDT:
This means you will receive more USDT for your colUSDC the closer to the expiry time you sell them (you’ll pay less interest for your loan). It also means that when you repay your loan earlier than the expiry time you are only paying interest on the duration you borrowed. More concretely, suppose you sold 1 colUSDC for 0.97 USDT with an expiry time 1 year in the future. After 6 months, the price of 1 colUSDC is now 0.98 USDT and you decide you want your USDC back, so you buy 1 colUSDC to burn with your 1 calUSDC rather than repaying the loan with USDT. In doing so you’ve only paid 0.01 USDT as interest on your loan, rather than the 0.03 USDT you originally expected to pay.
One last note: as a borrower, you should monitor the price of the COLL tokens you sold — if their price ever drops below what you sold them for, then you have an opportunity to turn your loan into a negative interest one.
As a Lender
A lender is someone who provides liquidity to Collar by using lending assets to buy COLL tokens and by being an LP for the lending asset/COLL token pools (see Core Concepts: Pools in Uniswap). As a lender, the COLL token gives you the right to collect a mix of the assets you lent and the defaulted collateral after the expiry time. Still following the same example, by being an LP for the USDT/colUSDC pool (in effect buying and holding the colUSDC tokens, which generally increase in price over time), you are earning interest and liquidity rewards. You can withdraw your USDT at any time before the expiry time by selling the colUSDC tokens for USDT. After the expiry time, you can redeem 1 colUSDC to collect a mix of repaid USDT/collateral USDC, worth $1 in total (its value doesn’t depend on the proportions received because we are assuming the underlying assets remain pegged). Therefore, lenders are primarily concerned with monitoring the price of COLL tokens, especially as the shared expiry time for the COLL tokens in a particular lending pool approaches.
One other thing to note is that if you are a lender of USDT for colUSDC and the price of 1 colUSDC ever goes above 1 USDT, then it definitely seems like a poor option to buy it. What you can do instead is deposit 1 USDC to mint 1 calUSDC and 1 colUSDC, and then sell your 1 colUSDC to earn > 1 USDT, and then not repay the loan (actually, Collar lets you skip the step of first getting USDC here by allowing you to directly mint colUSDC using USDT).
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