Borrowing Fees

The Lucia Protocol employs a one-time Borrowing Fee mechanism for the issuance of LUCI stablecoins. This fee structure is specifically designed to be both transparent and equitable, allowing borrowers to manage their capital costs with ease. The Borrowing Fee is calculated through a formula that incorporates a foundational base rate plus an additional 0.5% margin (as elaborated in Section 4.3, "Redemption Mechanism: Redemption Fee and Base Rate"). This sum is then multiplied by the volume of liquidity drawn by the borrower to arrive at the total fee.

Borrowing Fee Mechanics

A one-time Borrowing Fee is applied upon the issuance of LUCI stablecoins. This fee is computed using the formula:

The range of the Borrowing Fee is bounded between 0.5% and 5%:

The Borrowing Fee framework is engineered to correlate fees directly with the amount of liquidity utilized, thereby ensuring a fair system for all protocol participants. Fees are bounded within a specified range: the minimum Borrowing Fee is set at 0.5%, and the maximum cap is 5%.

Example:

Assume a base rate of 0.5%. The effective Borrowing Fee would then be 1% (0.5% base rate + 0.5% additional margin). If a user deposits 2 USDT to mint 2,000 LUCI, the incurred fee would be 20 LUCI, leading to a total debt of 2,020 LUCI.

Upon settling this total debt, borrowers can reclaim their collateral and any remaining funds in the Liquidation Reserve.