The Bitcoin ecosystem thrives on innovation, but one key piece has been missing: a seamless lending and borrowing protocol. This lack of options can frustrate Bitcoin holders who want to earn interest on their holdings, access liquidity without selling, or hedge against price fluctuations.

This is where Avalon Finance steps in. Built on the Merlin Chain, Avalon Finance is a CeDeFi solution specifically designed to address the needs of the Bitcoin ecosystem. It offers a user-friendly borrowing, lending, and earning platform, unlocking new possibilities for Bitcoin holders.

What is Avalon Finance?

Source: Avalon Finance website

Avalon Finance is a CeDeFi protocol built on the Merlin Chain blockchain that leverages the strengths of both centralized and decentralized systems to offer superior lending and borrowing services. By combining the efficiency and reliability of centralized finance (CeFi) with the transparency and security of decentralized finance (DeFi), Avalon Finance empowers Bitcoin holders to participate in a vibrant lending and borrowing marketplace, unlocking new avenues for generating returns and managing their assets strategically.

Here’s a breakdown of Avalon Finance’s core offerings:

• Borrowing: Users can borrow various crypto assets by depositing Bitcoin or other supported tokens as collateral. This provides access to instant liquidity without selling their holdings.
• Lending: Users can deposit their crypto assets into lending pools and earn interest on their holdings. Avalon connects lenders with borrowers, facilitating a smooth and efficient process.
• Earning: Beyond lending, Avalon offers additional ways to earn rewards. This may include staking the native Avalon Finance token ($AVAF) for governance rights and additional benefits.

Vision and Mission of Avalon Finance

Avalon Finance’s mission is to democratize access to financial services for Bitcoin holders and integrate them seamlessly into the broader DeFi landscape. Their vision is to become the premier lending and borrowing protocol within the Bitcoin ecosystem.

Features of Avalon Finance

Several key features differentiate Avalon Finance from other DeFi platforms:

• Focus on Bitcoin: Unlike many DeFi protocols built on Ethereum, Avalon prioritizes the needs of Bitcoin holders.
• Security and Stability: The Merlin Chain offers scalability and fast transaction speeds, crucial for a smooth user experience.
• Isolated Lending Pools: This innovative system minimizes risk by segregating assets into pools.
• Algorithmic Stablecoin: Avalon utilizes lending activity to maintain a stablecoin peg, fostering stability within the ecosystem.

The Three Key Components of Avalon Finance

Avalon Finance, Aave v2 fork lending protocol, operates on three core components, each playing a vital role in its functionality:

Overcollateralized Lending

A foundational lending protocol with an isolation pool mechanism supports a wide range of major and less liquid assets as collateral. This mechanism safeguards both lenders and borrowers. Borrowers must deposit collateral exceeding the value of their loan thereby mitigating the risk of default.

Algorithmic Stablecoin based on Lending

This is an overcollateralized algorithmic stablecoin that leverages the lending protocol to optimize capital efficiency for users. It can be used for various purposes within the platform, promoting overall stability and reducing reliance on volatile assets.

RWA (Real-World Asset) Lending

This innovative lending protocol is tailored for both permissioned and permissionless RWAs to maximize capital efficiency and yield farming. While details are still emerging, Avalon’s roadmap suggests the potential integration of real-world assets (RWAs) into its lending ecosystem. This could unlock entirely new possibilities for users seeking diversified investment opportunities.

Why Merlin Chain: The Powerhouse Behind Avalon Finance

Avalon Finance’s decision to build on the Merlin Chain is a strategic one. Merlin Chain, a Layer 2 solution specifically designed for the Bitcoin network, offers several advantages that are crucial for Avalon’s success:

Scalability

Bitcoin struggles with high transaction volume, leading to slow processing times and increased fees. Merlin Chain, through its Layer 2 architecture, tackles this issue by processing transactions off-chain before securely verifying them on the Bitcoin blockchain. This allows Avalon Finance to handle a significantly higher number of transactions efficiently, ensuring a smooth user experience for its borrowing, lending, and earning activities.

Speed

The scalability benefits of Merlin Chain translate into faster transaction speeds for Avalon users. Borrowing, lending, and earning rewards happen in near real-time, eliminating the frustration of waiting for transactions to be confirmed. This faster pace is essential for a dynamic DeFi platform where users may need to react quickly to market changes.

Security

While operating off-chain for efficiency, Merlin Chain leverages the robust security of the Bitcoin blockchain for final settlement. This ensures that all transactions on Avalon Finance are secure and immutable, safeguarding users’ assets.

Avalon Mechanism

Avalon Finance goes beyond the basic functionalities of borrowing and lending. It incorporates innovative mechanisms to optimize user experience and minimize risk. Let’s delve into two key aspects of the Avalon Mechanism:

Isolated Lending Pool Mechanism

Imagine a bank with a single vault for all deposits. If one type of asset experiences a sudden price drop, it could destabilize the entire system. This is where Avalon’s Isolated Lending Pool Mechanism shines.

Avalon utilizes separate lending pools for different asset classes.

• Main Pool: This pool accommodates permissionless assets characterized by stable prices and resistance to manipulation offering a balance between stability and potential returns.
• Innovation Pool: This pool is dedicated to newer, emerging crypto assets with higher potential returns and risks. Users with a higher risk tolerance can explore this pool for potentially lucrative opportunities.
• RWA Lending Pool: This pool caters to permissioned and permissionless RWA tokens, encompassing money market funds, equity indexes, and corporate bonds. This will unlock entirely new possibilities for users seeking diversified investment opportunities.

Benefits of Isolated Pools

• Reduced Risk of Contagion: If an asset in one pool experiences a price crash, it won’t directly impact the stability of other pools. This compartmentalization helps protect users’ funds by containing risk within specific asset classes.
• Enhanced Flexibility: Isolated pools allow Avalon to tailor interest rates and risk parameters for each asset class, creating a more efficient system for both borrowers and lenders. Borrowers can access funds in pools with lower collateralization requirements for specific assets, while lenders can choose pools that align with their risk tolerance and return expectations.

Interest Rate Mechanism

Avalon doesn’t rely on static interest rates. Instead, it employs a dynamic interest rate mechanism that adjusts based on supply and demand within each lending pool.

When a particular asset has a high supply in the lending pool (many users are depositing), interest rates for lenders decrease. This incentivizes borrowing and balances the system by encouraging users to utilize the available liquidity. Conversely, if an asset becomes scarce within a pool (due to high borrowing demand), interest rates for lenders increase. This incentivizes users to deposit more of that asset and meet the borrowing demand, ultimately increasing the liquidity available within the pool.

Unique Features of Interest Rate Mechanism

• Variable Rates: Interest rates constantly fluctuate based on real-time supply and demand within each pool, ensuring a dynamic and efficient marketplace. This allows users to earn higher returns during periods of high demand for a particular asset.
• Utilization Ratio: This indicates the availability of capital within the pool. Avalon uses the utilization ratio when determining interest rates. A higher utilization ratio might trigger higher interest rates to incentivize more lending and maintain pool health. This ensures there are sufficient funds available to meet borrower demand.

How to Use Avalon Finance

Avalon Finance empowers users to participate in a vibrant DeFi marketplace. Whether you’re a seasoned DeFi veteran or just starting your crypto journey, Avalon offers a user-friendly platform to manage your Bitcoin and other digital assets.

How to Supply Assets on Avalon Finance

1. Connect your wallet: Visit the Avalon Finance platform and connect your preferred crypto wallet using the wallet connect option.

1. Select a lending pool: Avalon utilizes isolated lending pools, offering flexibility and varying risk profiles. You can select between the main pool and the innovation pool.

2. Choose an asset to supply: Select the crypto asset you wish to deposit.

3. Specify your supply amount: Enter the amount of the chosen asset you want to deposit into the pool.

1. Review and confirm: Double-check the pool selection, supply amount, and any associated fees before confirming your transaction.

How to Borrow Assets on Avalon Finance

1. Visit the Avalon Finance platform and connect your preferred crypto wallet using the wallet connect option.

1. Select the type of pool you want to borrow assets from.

2. Choose the asset you want to borrow from the list of assets available

3. On the asset details page, please check every collateral info before you click “borrow”.

1. Enter the amount of assets you want to borrow, and please check the health factor number before you send the transaction.

Crucial Reminder: Borrowing involves inherent risks. To avoid having your collateral liquidated by the platform, it’s essential to understand liquidation risks and maintain a healthy collateralization ratio.

How to Loop Your Borrowing on Avalon Finance (Advanced Strategy)

Avalon Finance offers a feature called “looping your borrowing,” which allows you to automatically re-borrow your loan repayments to amplify your position. It’s recommended only for experienced users who fully understand the associated risks. Here’s a simplified guide to loop your borrowing:

1. Visit the Avalon Finance dashboard page.

1. Locate the option to enable looping on your borrow position. This essentially sets up an automatic loop where your loan repayments are used to re-borrow the same asset.

2. In the pop-up window, choose the leverage ratio you want. Check all the information before you approve and loop your asset.

How to Avoid Liquidation on Avalon Finance

One key thing to remember when borrowing on DeFi platforms like Avalon Finance is managing your position effectively to avoid liquidation.

Liquidation occurs when a borrower’s health factor goes below 1 due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases against each other. This collateral vs. loan value ratio is shown in the health factor.

Consequences of Liquidation

To maintain pool health, Avalon automatically initiates liquidation by selling a portion (or all) of your collateral to buy back the borrowed asset and repay the lender. Essentially, you lose a portion of your crypto holdings to cover the loan. The liquidation process might incur additional fees, reducing your returns or increasing your losses.

Tips to Preventing Liquidation on Avalon Finance

Avalon has a minimum health factor of 1 for each borrowable asset. This ratio indicates the minimum value your collateral must hold compared to your borrowed amount. Always ensure your health factor is above 1 to avoid liquidating your asset. Regularly monitor your health factor and consider adding more collateral if the value of your borrowed asset fluctuates.

Also, don’t borrow to the maximum limit, especially for volatile assets. Leave a buffer room to account for potential price movements and avoid getting close to the liquidation threshold. If the value of your borrowed asset increases significantly, consider setting take-profit orders to automatically sell a portion of your holdings and reduce your loan size. This helps maintain a healthy health factor and protects you from liquidation if the price reverses.

Avalon Finance Tokenomics

$AVAF serves as the governance token of Avalon Finance with an Elastic Supply token model. With a forecasted maximum supply of 1 billion, $AVAF mainly incentivizes usage of the protocol and liquidity providers. Here’s a breakdown of the token distribution:

Source: Avalon Finance White Paper

Token Utility

$AVAF has a multitude of purposes within the Avalon Finance ecosystem. This includes:

• Governance: $AVAF token holders have voting rights on crucial proposals shaping the future of Avalon Finance. This could include changes to interest rates, borrowing risk parameters, or adding new features. By staking their $AVAF tokens, users can influence the platform’s development and direction.
• Staking Rewards: Avalon incentivizes users to lock up their $AVAF tokens for a specific period (staking) to earn rewards. These rewards could come in various forms, such as additional $AVAF tokens or a portion of the platform’s fees.

Conclusion

Avalon Finance emerges as a compelling platform for Bitcoin holders and crypto enthusiasts seeking to unlock new avenues for earning and managing digital assets. Whether you’re a seasoned DeFi user or just starting your crypto journey, Avalon offers a user-friendly platform to explore new possibilities. Head over to the Avalon Finance platform and explore its exciting opportunities.