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 on Arbitrum.

Who developed Covenant?

Covenant is built by various developers, including engineers 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.

What is a zToken?

A zToken is an erc-20, synthetic representation of a borrowers debt. Borrowers mint zTokens after depositing collateral, and then swap the zToken for money on an external DEX. Each Covenant market has it's own zToken.

What is a dToken?

A dToken is an erc-20, synthetic representation of the amount of zTokens a borrower has minted. It is the other side of the loan the borrower minted - a representation of their liability. dTokens are non-transferrable. A borrower pays back their loan by buying zTokens in the open market and cancelling their dTokens with zTokens 1:1.

What determines a Covenant debt market'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 from falling to zero?

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 optionality of swapping zTokens for borrower collateral (by the borrower, or by liquidators in some circumstances), that relates the value of zTokens to the value of the collateral locked in the Covenant protocol.

Is the interest rate fixed or floating?

A bit of both. It is floating in that it is determined by the spot price of the zToken in the market. But zToken price dynamics make the interest rate fixed over short periods. We call it a "slow variable rate' in that in the very short term it is fixed but slowly goes following the market rate.

If the debt on Covenant is perpetual, and the interest rate is floating, why do the markets 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 money than I expected.

The LTV for borrowers is calculated using the notional borrow amount. However, zTokens usually trade below this value on the open market, so less money is received when swapping the zTokens for money.

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. There is a max slippage setting that helps protect users from adverse price movements, just like on Uniswap.

What oracle is used to monitor collateral value?

Each collateral / market has different oracle sources, including Uniswap TWAPs and Chainlink. Please refer to the market details page for additional info.

Is there a token?

Not at this time.