FAQ

See below for commonly encountered questions. If anything is still unclear, feel free to ask in the Discord!

General

What is Covenant?

Covenant is a capital-efficient borrowing and lending protocol that can accept any crypto asset as collateral. It is currently deployed as a capped (deposit and guild-level caps) beta on Arbitrum and Optimism.

Who developed Covenant?

Covenant is built by a team of developers at Tazz Labs

Covenant dApp

Why can Covenant offer lower spreads than utilization-based protocols like AAVE/Compound?

Utilization-based protocols lump the lender and liquidity provider into one role. To prioritize on-demand liquidity, there is always lender/LP capital that is not borrowed. This idle capital causes the spread between borrow and lend rates. In contrast, Covenant splits the lender/LP role into distinct lender and LP roles. There is no spread between lender borrow and lend rates (small exception for Uniswap zToken swap fees) because lenders cannot over-allocate lending capital. Said another way, they cannot buy more debt than is in a guild's liquidity pool. For more, see here.

What is a guild?

Guilds implement all functionality related to collateral management (including liquidations), underwriting, debt accounting, and dToken/zToken mint/burning. Guilds accept some combination of collateral, and offer some currency as money. Guilds do not share collateral with other guilds. In this way, guild risk is isolated.

What is a zToken?

A zToken is an erc-20, synthetic asset representation of borrower collateral. Borrowers swap the zToken of a respective guild for that same guild's money asset. Each guild has its own zToken.

What is a dToken?

A dToken is an erc-20, synthetic debt representation of borrower collateral. dTokens are non-transferrable. dTokens and zTokens are invariant. A borrower's collateral can only be recovered (by the borrower or a liquidator) by burning a respective collateral's dTokens. dTokens are burned with zTokens.

What determines a guild's interest rate?

The interest rate is determined by the spot price of the zToken. The price and interest rate are inversely related. As the price of a zToken goes down, the effective interest rate increases, incentivizing borrowers to repay their debt and lenders to buy it. As the price of a zToken goes up, the interest rate decreases, incentivizing borrowers to take out loans and lenders to sell debt. In this way, the interest rate is determined by the market.

What keeps the zToken price of a guild from falling to zero?

ZTokens are a liquid representation of collateral. Borrowers sell zTokens for a guild's basis currency, but they must buy them back to cancel their debt and redeem their collateral. Liquidators also must buy zTokens to perform liquidations. It is this built-in demand for zTokens which supports their value.

Is the interest rate fixed or floating?

The interest rate is floating, and is determined by the spot price of the zToken.

If the debt on Covenant is perpetual, and the interest rate is floating, why do the guilds specify a duration?

The 'duration' on Covenant is not an maturity date, but an implied maturity date, a parameter which calibrates the sensitivity of a guild's zToken price to changes in that guild's interest rate. A guild with a longer duration will require larger zToken price changes to have the same effect on interest as a guild with shorter duration.

I tried to borrow at the maximum LTV, but I received less than I expected.

The LTV for borrowers is calculated using the notional borrow amount, not the actual amount borrowed.

When I borrow and/or lend, why do I see slippage?

When you borrow or lend on Covenant, you're actually swapping debt tokens (zTokens) and base currencies (e.g. USDC or WETH) using Uniswap v3 pools. This max slippage helps protect users from adverse price movements, just like on Uniswap.

What oracle is used to monitor collateral value?

Collateral value is based on a 30min TWAP from Uniswap pools.

When does a borrower get liquidated?

Liquidations can occur if the collateral value falls below the notional value of outstanding debt. For greater detail, see the Liquidations section.

Is there a token?

Not at this time.