Basic Principles

Mutuum organizes its lending markets around dedicated liquidity pools for each supported cryptocurrency. When lenders deposit their assets into these pools, they receive a corresponding yield based on the pool’s utilization rate. Borrowers access these reserves by locking collateral of higher value than the loan amount to ensure overcollateralization.

The protocol determines which assets may serve as collateral by evaluating factors like volatility, liquidity, and several different risk parameters, aiming to reduce risk for depositors and the system at large. Each asset in Mutuum’s ecosystem has a Loan-To-Value (LTV) ratio assigned to it, indicating the maximum borrowing power relative to its collateral value. If borrowers combine multiple forms of collateral, the protocol calculates a weighted LTV by converting each asset into a common reference unit.

Borrowers can choose from variable and stable interest rates (or any future rate models), and there is no preset deadline for repayment. They can repay their borrow positions in part or in full at any time, as long as they maintain a sufficient collateral-to-debt ratio to avoid liquidation. By offering flexible terms and robust risk controls, Mutuum strives to create a secure, user-friendly environment for both lenders and borrowers.

Mutuum employs a deposit-token mechanism for users who supply assets to its lending pools. When a depositor provides liquidity, the protocol mints “mtTokens” at a 1:1 nominal ratio to the deposited asset (e.g., mtETH for ETH, mtDAI for DAI). Instead of altering the exchange rate, Mutuum directly updates the redemption value of each mtToken to reflect accrued interest, meaning that over time, each mtToken can be redeemed for an increasing amount of the underlying asset. Returning mtTokens to the protocol reverses the initial deposit process. Upon redemption, the holder exchanges their mtTokens back for the corresponding amount of the underlying asset, which now includes the interest accrued during the holding period. Once redeemed, the mtTokens are typically burned (removed from circulation) by the protocol to maintain the correct overall supply.

This system simplifies user experience by keeping the minting ratio intuitive at the start (1:1), while automatically adjusting each mtToken’s redeemable worth as interest is generated. In effect, a depositor’s mtToken balance represents both their original contribution and the continuous interest earned from borrowers.

Since mtTokens are fully compliant with the ERC20 standard, users can transfer them to any compatible address. If a secondary market is established—such as a pool on a decentralized exchange - mtTokens can also be traded, opening up further opportunities for liquidity providers and external market participants. Regardless of where the tokens reside, they keep accumulating interest, as the protocol updates their redeemable value in real time.

By adopting this deposit-token model, Mutuum offers transparency (each mtToken shows precisely how much underlying asset it represents at any given moment) and flexibility (tokens can be used in various DeFi scenarios). This dynamic approach to interest accrual helps ensure a seamless experience for both lenders and borrowers within the Mutuum ecosystem

Mutuum enforces a liquidation threshold to protect lenders from undercollateralized positions. If the market value of a borrower’s collateral falls below this threshold, the protocol triggers a liquidation event. In such cases, liquidators are rewarded with a liquidation incentive, allowing them to acquire the collateral at a price lower than its prevailing market value.

When users pledge more than one type of collateral, Mutuum calculates a composite liquidation threshold by converting each collateral asset into a common reference unit and applying a weighted average of each asset’s individual threshold. This mechanism ensures that the overall risk of a multi-collateral position is accurately represented.

A position’s stability factor reflects the ratio between the adjusted collateral value and the outstanding debt. If the stability factor slips below a critical level, liquidation may occur. Borrowers have the flexibility to stabilize their positions by adding more collateral or repaying part of their loan before reaching the liquidation point, enabling them to manage risk in a volatile market environment.