Borrowers

Borrowers who want to choose a fixed interest rate instead of accepting a protocol-defined rate.

Lenders

Lenders who want to earn interest on their tokens while maintaining liquidity through redemptions.

Borrowers

Borrowers who are unwilling to have their position redeemed by someone else.

Lenders

Lenders who are unwilling to pay swap fees to exit.

Flex borrows Liquity's V2 ideas of fixed interest rates and liquidity managed through redemptions.

Liquity is a stablecoin issuer, while Flex is a general-purpose money market connecting borrowers and lenders.

When borrowing on Flex, borrowers open a Trove by (1) locking collateral (2) choosing how much to borrow and (3) choosing a fixed interest rate

Once the Trove is opened, the interest rate does not change unless the borrower chooses to update it.

After a Trove is opened, it may change over time.

At any point, another user may reduce your debt. When this happens, a corresponding amount of your collateral is sold.

This process is called a redemption and is how liquidity is maintained on Flex.

Borrowers can reduce the likelihood of being affected by redemptions by choosing a higher interest rate.

When redemptions occur, they start with Troves offering the lowest interest rates and move upward.

Choosing a higher rate does not prevent redemptions, but it makes them less likely.

Borrowers are responsible for ensuring their Trove remains sufficiently collateralized.

If a Trove's collateral value falls below the minimum required level, it may be liquidated and closed.

Lenders provide tokens to a Flex market in order to earn interest from borrowers.

Interest earned by lenders comes from the fixed interest rates chosen by borrowers.

Lenders deposit their borrow tokens into a Lender Vault. The Lender Vault is a ERC4626 Yearn tokenized strategy vault that represents a lender's share of the market.

As interest and fees are earned, the value of each vault share increases over time.

Lenders can exit at any time.

If there is not enough idle liquidity available, exiting lenders reduce existing Troves' debt by selling a corresponding portion of the borrowers' collateral.

This process is called a redemption.

Exiting a position may involve costs.

If sufficient idle liquidity is available, lenders can exit without cost.

If not, part of the exit is executed through redemptions, which may involve market-based costs depending on collateral prices and execution conditions at the time.

In a Dutch auction:

• The price starts high
• The price gradually decreases over time
• The first buyer willing to accept the price completes the trade

During a redemption:

1. Collateral is placed into a Dutch auction
2. The auction runs until a buyer is found
3. The proceeds are paid to the redeemer

This process happens asynchronously and does not rely on predefined swap paths.

• Borrowers do not control the price at which their collateral is sold during a redemption
• Lenders and redeemers may receive more or less than the nominal amount, depending on market conditions

This is why redemption proceeds can differ from the headline amounts shown in examples.

Two reasons:

• Anyone can compete to fill an auction, so Flex doesn't need to integrate with DEXes or actively manage routes.
• The starting price is set above market, which prevents instant arbitrage when Flex's price drifts from the market's.

While an auction is live, its price decreases over time.

Once the current price reaches or falls below the market price, taking the auction becomes profitable. A Take button enables on the auction page and anyone can click it to settle the auction.

If you don't, bots typically pick up auctions automatically as soon as they become profitable.

If an auction reaches its minimum price without being filled (e.g. the amount is too small to be worth taking, or market conditions move against it), it sits unsettled.

At that point a Re-Kick button enables on the auction page. Anyone can click it to restart the auction with a fresh starting price.

Liquidators choose how much debt to repay, with two limits:

1. They can only repay enough to bring the Trove back to a safe collateral ratio. This avoids liquidating more than necessary.
2. They can't leave dust. If the remaining debt would fall below a threshold, the Trove must be fully liquidated.

The bonus liquidators receive scales with how unhealthy the Trove is. Riskier positions offer higher bonuses, incentivizing liquidators to clear the most unhealthy Troves first.

If a Trove's collateral is worth less than its debt, liquidators still have an incentive to act.

The liquidator gets all the collateral and the entire remaining debt is cleared from the system. The shortfall is socialized as a loss to lenders atomically.