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How do undercollateralized loans for leveraged trading work?
The trader deposits $50,000 BUSD as collateral into the Protocol.
The trader loans $50,000 BUSD from the lending pool.
Borrower invests into $100,000 worth of BTCB. In this step, the Protocol initiates a trade on PancakeSwap to change $100,000 (minus loan fee of X%) BUSD into BTCB. The BTCB is then escrowed by the Protocol.
Example Case A
The price of BTC has now decreased by 40% ($60,000 total collateral) and a liquidation event is triggered.
The BTCB is swapped on PancakeSwap into $60,000 BUSD. $50,000 is sent to the lending pool and $10,000 (minus a liquidation fee of X%) is sent to the trader.
Example Case B
The price of BTC has now increased by 50% ($150,000 total collateral) and the trader closes out the loan.
The BTCB is swapped on PancakeSwap into $150,000 BUSD. $50,000 is sent to the lending pool and $100,000 (minus loan fee of X%) is sent to the trader.