# Pawnfi Document Hub

Welcome to Pawnfi Protocol.

Pawnfi, the Pioneering NFT Liquidity Initiator, is reshaping NFT finance with our comprehensive All-In-One system. We cater to everyone in the NFT community, from holders and traders to newcomers, providing a platform to effortlessly trade, lend, and earn. Experience the transformation of NFT finance with Pawnfi, where every user can tap into the full potential of the NFT ecosystem.

This hub will include all of the critical knowledge of Pawnfi. Please use the direct links in the space to look into any documentation and resources on Pawnfi. 

## Useful links

**Website:** [**https://pawnfi.com/**](https://pawnfi.com/)

**DApp:** [**https://app.pawnfi.com/**](https://app.pawnfi.com/)

**User Guide:** [**https://guide.pawnfi.com/**](https://guide.pawnfi.com/)

**Snapshot:** [**https://snapshot.org/#/pawnfiprotocol.eth**](https://snapshot.org/#/pawnfiprotocol.eth)

**Twitter:** [**https://twitter.com/pawnfiofficial**](https://twitter.com/pawnfiofficial)

**Discord:** [**https://discord.gg/TakWPrs8Az**](https://discord.gg/TakWPrs8Az)

**Medium:** [**https://blog.pawnfi.com/**](https://blog.pawnfi.com/)

**Telegram:** [**https://t.me/pawnfiprotocol**](https://t.me/pawnfiprotocol)

**Github:** [**https://github.com/PawnFi**](https://github.com/PawnFi)

**Dune Analytics: TBU**


# Understanding Pawnfi

Pawnfi is a leading provider of instant liquidity solutions for NFTs. Our platform offers a one-stop shop for traders, creators, investors, and borrowers seeking unlimited cash flow and yield. By leveraging the P-Token mechanism and integrating multi-modal features, Pawnfi can unlock deep liquidity and tap into the potential of NFTs in the DeFi space without requiring ownership or digital asset transfers. 

In the current NFT market, illiquidity has become a significant issue, and existing solutions need help to reconcile ownership, efficiency, and compatibility simultaneously. Pawnfi stands out by introducing a comprehensive P-Token solution that facilitates the circulation of NFTs like ERC-20 tokens in liquidity markets. In addition, our P-Token mechanism provides a protective layer that safeguards NFTs against extreme circumstances, enabling them to circulate safely within the Pawnfi protocol and across the broader DeFi ecosystem. 

At Pawnfi, we aim to create a real NFT secondary market by allowing financial attributes to penetrate various asset classes of users. Our innovative Pawnfi Protocol design enables traders to enjoy a secondary market where they can trade, lend, and earn, thereby increasing the actual value of NFTs. In contrast, existing platforms like Blur/OpenSea and other NFT finance platforms only offer a semi-primary market, where tokens are traded among different whales and reach fewer buyers or users, resulting in a market ceiling. 

In summary, Pawnfi is revolutionizing the NFT market through our P-Token mechanism and Pawnfi Protocol design. Join us today to experience a new level of liquidity and potential.


# Pawnfi Modules

## Flash Trade: NFT ↔ P-Token

Flash Trade is a trading house that allows users to exchange NFTs and their corresponding P-Token rapidly. With Flash Trade, individuals can seamlessly convert one of their NFTs into 1,000 P-Token. Additionally, users may opt to exchange 1,000 P-Token for a randomly selected NFT from the flash trade vault, subject to a service fee. Alternatively, users may choose to designate a specific NFT for exchange, in which case a nominal designation fee applies.

## NFT Leverage: Obtain Loan Instantly Without Liquidation Risk

NFT Leverage is a novel financial service that enables users to obtain a corresponding P-Token utilizing their NFTs as collateral rapidly. With NFT Leverage, individuals can pledge one of their NFTs as collateral and receive a loan amounting to 1,000 P-Token (subject to deductions based on loan duration and interest rate). Subsequently, users may retrieve their NFTs by repaying the P-token loan plus accrued interest. It is worth noting that price fluctuations will not result in mid-term liquidation.

## Consignment: Receive Upfront Payment when Selling NFTs

Consignment is a process whereby users can sell their NFTs and receive an upfront payment in the corresponding P-Token. For instance, a user may consign one of their NFTs on Pawnfi for sale and receive 1,000 P-BAYC as upfront income, subject to deductions for withholding custody fees based on the consignment period and interest rate. Subsequently, the user may either retrieve their NFT by repaying the upfront payment and custody fee or continue listing the NFT for sale and earn a capital gain upon its sale. The consignment process provides users with flexibility in monetizing their NFT assets while enabling them to retain ownership and benefit from future price appreciation.

## Cross-Margin Lending Market: NFT x DeFi Money Market

Pawnfi's lending market is a NFT x DeFi money market that enables users to supply their tokens in exchange for borrowing desired assets. For instance, a user may supply ERC-20 tokens or NFTs on Pawnfi's lending market to borrow supported ERC-20 tokens, including P-Token. As with other DeFi lending markets, users must repay their debt before withdrawing their collaterals. Pawnfi's lending market provides a secure and efficient means of leveraging token holdings to obtain desired assets without traditional intermediaries.


# Key Vehicle: P-Token

P-Token is a new concept in the world of NFTs that seeks to address the issue of liquidity and functionality. It represents NFT collections in an ERC-20 token format, enabling their use in DeFi applications and trading platforms. Each NFT collection has its corresponding P-Token, which can be obtained through selling, borrowing, lending, or consignment. The use of P-Token provides greater liquidity and functionality to NFT collections, allowing them to be used in a broader range of use cases. As such, P-Token serves as the foundation for NFT finance, facilitating greater adoption and use of NFTs in the broader financial ecosystem. The formula for understanding P-Token is as follows:

{% hint style="info" %}
Any BAYC = 1,000 P-BAYC

Any MAYC = 1,000 P-MAYC

Any CryptoPunks = 1,000 P-PUNK

......
{% endhint %}

P-Token serves as the primary vehicle for Pawnfi's modules and represents the best practice for integrating NFTs into the DeFi ecosystem. Upon its launch, Pawnfi will support the first batch of NFT collections that are compatible with P-Token. As the Pawnfi ecosystem grows and PawnfiDAO develops, other NFT collections will be integrated, expanding the range of assets available for P-Token-based transactions. By utilizing P-Token, Pawnfi provides a means for NFT holders to participate in DeFi applications and benefit from the liquidity, composability, and versatility of ERC-20 tokens.

## How do I obtain P-Token?

1. Users can easily swap NFT and P-Token at the ratio of 1:1000 in [Flash Trade](/getting-started/understanding-pawnfi/pawnfi-modules/flash-trade).
2. Users will obtain short-term P-Token via participating in
   1. NFT Leverage
   2. Consignment
3. By supplying/ depositing NFTs in Lending Market, a certain amount of P-Tokens will be automatically showing on the user's account, which increases the borrow limit (similar to how you supply & borrow on Aave/ Compound, just that in Pawnfi you can also supply supported NFTs).
4. Users can borrow P-Token (and other ERC-20 tokens) by supplying/ depositing supported ERC-20 tokens (including P-Token).
5. Simply buy P-Token on DEXs like Uniswap.

 


# Flash Trade

Make NFT trade interchangeably in ERC-20 format

Pawnfi's Flash Trade feature allows users to instantly swap between NFTs and P-Token at a ratio of 1:1,000, facilitating seamless and efficient buying and selling of NFTs. For instance, a user may exchange N x mNFT for N x 1,000 x P-mNFT through the Flash Trade platform. This allows users to obtain P-Token exposure or liquidate NFT assets quickly and flexibly. In addition, Flash Trade's 1:1,000 ratio provides users with ample liquidity and transactional capacity, enabling them to optimize their NFT portfolios while maximizing their returns. Only supported collections in [P-Token List](/getting-started/understanding-pawnfi/p-token-list) are Flash Trade compatible.

<figure><img src="/files/seWjeEuTuxKho4iVlSbi" alt=""><figcaption></figcaption></figure>

## How to swap NFTs for P-Tokens?

Here is a step-by-step guide on how users can get P-Tokens with their NFTs:

1. Go to "Flash Trade" page, and select an NFT collection (our front-end will be displaying only supported collections). In this example, the user select "Bored Ape Yacht Club"
2. Choose the NFTs that you wish to swap P-Tokens with.
3. Based on the amount of NFTs, user will receive N x 1,000 P-BAYC in this example.
4. After execution, user will see N x 1,000 P-BAYC in his/ her wallet.
5. User's original NFTs will flow into corresponding NFT vault (in this case, BAYC vault).&#x20;

{% hint style="info" %}
There will be no extra fee charged when swapping NFTs for P-Token.
{% endhint %}

## How to swap P-Tokens for NFTs?

Here is a step-by-step guide on how users can get NFTs with P-Tokens:&#x20;

1. Go to "Flash Trade" page, and select an NFT collection (our front-end will be displaying only supported collections). In this example, the user selects "Bored Ape Yacht Club".
2. If there are available NFTs in BAYC vault, user can either
   1. Swap random BAYCs
   2. Swap specific BAYCs
3. Service fee will be charged based on different cases.
   1. In this example, if user swaps 1 BAYC randomly, he/ she will need to pay 0.5% service fee. That is, 1,005 P-BAYC
   2. If user swaps 1 specific BAYC, he/ she will need to pay 0.5% service fee and 1% designation fee. That is, 1,015 P-BAYC
4. Afterwards, BAYCs will be automatically sent to user wallet.
5. Please note that service fee and designation fee might be changed due to market condition or through a successful Pawnfi Governance proposal.

{% hint style="info" %}
Users must have P-Token specific to certain collection in their wallet to swap for corresponding NFTs of that collection.
{% endhint %}


# NFT Leverage

Obtain loan instantly without liquidation risk

While Flash Trade offers users the ability to buy and sell NFTs instantly, it does not guarantee that users can repurchase the same NFT, as other users from the vault may acquire it. To cater to the market demand of users seeking P-Token exposure without forfeiting their original NFT, Pawnfi introduces "NFT Leverage."&#x20;

By pledging their NFTs as collateral, users can borrow corresponding P-Tokens, with a nearly 100% LTV. Notably, users are guaranteed to receive their original NFT back as soon as they repay the P-Tokens, which will be safeguarded in our audited and verified smart contract by PeckShield. NFT Leverage provides a secure and efficient means of obtaining P-Token exposure while retaining ownership of NFT assets.

Please note, Pawnfi's leverage mirrors the isolated margin lending structure - each NFT borrowing instance initiates a unique loan order, where interest and loan duration are calculated separately. So, for instance, if you aim to borrow against 10 NFTs, you need to open 10 individual leverage orders.

<figure><img src="/files/9PNPcTb8V9vX1B46jNxc" alt=""><figcaption></figcaption></figure>

## How to borrow out P-Tokens with NFTs?

Here is a step-by-step guide on how users can get short-term P-Tokens with their NFTs:

1. Go to "NFT Leverage" page, and select an NFT user would like to borrow against (our front-end will be displaying only supported collections). In this example, the user select one of his "Bored Ape Yacht Club"
2. Select a duration in which user wishes to hold this position. In this case, 30 days.
3. There will be a 10% annual margin rate deducted from the leverage amount, which is 1,000 P-BAYC, as an upfront interest. That is, user will receive 1,000 x (1 - 10% x 30/365) = 991.78 P-BAYC
4. After approval, 991.78 P-BAYC will be sent to user's wallet, and the BAYC will be locked in the Leverage Contract.
5. To get back user's leveraged BAYC after N days, he/ she needs to pay back 991.78 +1,000 x (10% x N/365)
6. After approval, the original BAYC will be sent back to user wallet.
7. Please note that margin rate might be changed due to market condition or through a successful Pawnfi Governance proposal.

{% hint style="info" %}
As the interest is calculated every block, the final amount will be slightly different from our example.
{% endhint %}

## Is there any benefit to borrow out P-Tokens with NFTs?

Of course! There are two main reasons borrowers should obtain liquidity through Pawnfi's leverage module: nearly 100% LTV and 0 risks of mid-term liquidation.

### 100% LTV

Even though the loan amount is calculated in P-Token, you can quickly settle in ETH through our smart router. Imagine borrowing 70 ETH against your Bored Ape with a 75 ETH floor price - this is an everyday use case in Pawnfi!

### 0 risk of mid-term liquidation

When borrowing P-Token against NFT in Pawnfi NFT Leverage module, borrowers will not be vulnerable to any liquidation risk due to price volatility during loan period. As long as borrowers pay back the calculated P-Token amount before expiration, they will be able to get back their NFT.

Unlike normal NFT lending platforms where borrowers are exposed to both ETH and NFT price volatility, Pawnfi will keep risk more manageable as the only exposure will be P-Token amount.

## What if I did not pay back on time?

A default will happen when borrowers fail to repay the debt according to the above agreement. Please see more details in [NFT Leverage Liquidation](/risk/risk-framework/liquidation#nft-leverage).


# Consignment

Receive upfront payment when selling NFTs

Pawnfi's P-Token mechanism eliminates the need for NFT holders to lowball their listings to achieve faster matches for cash flow. The P-Token design allows Pawnfi to offer upfront payment to NFT holders when selling their NFTs. Consigning NFTs on Pawnfi requires locking the NFT in a smart contract rather than just providing a signature and authorization, as with standard listings.

However, users need not worry, as this smart contract has been audited and verified by PeckShield and can securely handle the selling process. By utilizing smart contracts, Pawnfi provides users with increased security and transparency, as well as faster and more efficient transaction processing.

<figure><img src="/files/vaVvJSCQ8PazUGa37rTX" alt=""><figcaption></figcaption></figure>

## How to consign NFTs?

Here is a step-by-step guide on how users can get an upfront payment by consigning NFTs on Pawnfi:

1. Go to "Consign" page, and select an NFT user would like to sell (our front-end will be displaying only supported collections). In this example, the user select one of his "Bored Ape Yacht Club"
2. Select a duration in which user wishes to consign. In this case, 30 days.
3. A 10% annual interest rate will be deducted from the base income, which is 1,000 P-BAYC, as Custody Fee. Therefore, the user will receive 1,000 x (1 - 10% x 30/365) = 991.78 P-BAYC as an upfront payment.
4. User needs to set the sale price (denoted in P-Token). In this case, 2,000 P-BAYC.
5. After approval, the user will receive and see 991.78 P-BAYC in their wallet, and the BAYC will be locked in the Consign Contract and listed for sale in the market.
6. If this BAYC is sold on the 20th day, Pawnfi will charge a 1% capital gain as a service fee. The remaining amount and unspent custody fee will be sent to the user's wallet. In this case, (2,000 - 1,000) x 99% + 1,000 x (10% x 10/365) = 992.74 P-BAYC. The upfront payment is not required to be returned.
7. If the user decides an early termination after N days, to get back user's consigned BAYC, he/ she needs to pay back 991.78 + 1,000 x (10% x N/365)
8. If eventually no one purchases this BAYC within 30 days, to get back the user's consigned BAYC, they need to pay back 1,000 P-BAYC.
9. After approval, user will receive and see the original BAYC in his/ her wallet.
10. Please note that interest rate and service fee might be changed due to market conditions or through a successful Pawnfi Governance proposal.

{% hint style="info" %}
As the custody fee is calculated for every block, the final amount will differ slightly from our example.
{% endhint %}


# Cross-Margin Lending Market

NFT x DeFi Money Market

Pawnfi's Cross-Margin Lending Market is a decentralized lending contract that provides individuals and protocols with permissionless and fully transparent access to financial services. Like Aave/Compound, users can lend/supply any supported tokens on our markets and utilize the provided capital to borrow another supported token.&#x20;

Notably, Pawnfi supports not only stablecoins (USDT, USDC, DAI, etc.) and mainstream coins (ETH, WBTC, etc.) but also NFTs (BAYC, MAYC, CryptoPunks, etc.). This enables users to utilize NFTs no differently than ERC-20 tokens within Pawnfi's money market. The list of supported assets will continuously expand based on PawnfiDAO governance, providing users with a wide range of assets to leverage and borrow. Pawnfi's Cross-Margin Lending Market offers a secure and efficient means of accessing financial services while promoting greater inclusivity and diversity in the DeFi ecosystem.

<figure><img src="/files/xtH9YAm6FJcNjI3tP5bT" alt=""><figcaption></figcaption></figure>

## How do NFTs work in Cross-Margin Lending Market?

P-Tokens will be the media of how NFTs take effect in the lending market. That is, while supplying 3 BAYC, it is equivalent to supplying 3,000 P-BAYC to the market. Therefore, it not only increases the borrow limit of this supplier but also gives others exposure to P-BAYC for borrowing through the pool.

These supplied NFTs will be safely placed in smart contract rather than directly flowing to the market. While there is sufficient liquidity in the pool and enough P-Token amount on users’ position, they can get back supplied NFTs anytime they are willing to exit.

## Is there any benefit from supplying NFTs?

Each token market has its Supply interest rate (APY), and there is no exception to P-Token. As supplying NFTs does equate to supplying P-Tokens, it has the same benefit as supplying any other ERC-20 tokens like USDT/ ETH - earning interest! That is, rather than sitting in your wallet, spare NFTs can earn passive income for users in Pawnfi's lending market.


# NFT Marketplace

Pawnfi's NFT Marketplace is a decentralized platform designed for NFT trading. Users can list or consign their NFT assets for sale or make offers to purchase items of interest. The marketplace displays assets supported by Pawnfi, user listings, and liquidated items from Pawnfi's NFT vault. The platform also features an Omni search engine and smart filters, enabling users to find and discover exciting NFT items easily.&#x20;

Buying and selling on Pawnfi's NFT Marketplace is similar to interacting with other NFT marketplaces, such as OpenSea and LooksRare, providing users with a familiar and intuitive experience. Pawnfi's NFT Marketplace offers a secure and efficient means of buying, selling, and discovering NFT assets while promoting greater inclusivity and innovation in the NFT ecosystem.

Please note: All the supported collections can be found on Pawnfi's official website.


# Interest Bearing Token (iToken)

Foundation of Cross-Margin Lending Market

Each token supported in **Pawnfi Cross-Margin Lending Market** is integrated through a separate iToken contract, which is an EIP-20 subsidiary that represents balances supplied to the protocol. By minting iTokens, users (1) earn interest through the iToken's exchange rate, which increases in value subject to the underlying token, and (2) gain the ability to use iTokens as collateral.

iTokens, which stand for "Interest Bearing Tokens", are derivatives of an underlying token and also the primary means of interacting with the Pawnfi Protocol; when a user supplies, redeems, borrows, repays, liquidates, or transfers iTokens, he/ she is actually interacting with the iToken contract.

## How do iTokens earn interest?

Each token market has its own Supply interest rate (APY). Interest will not be directly distributed to users' accounts; instead, it will be accrued to the amount of iToken held by users.

iTokens accrues interest through their exchange rate — over time, each iToken becomes convertible into an increasing amount of its underlying token, even while the amount of iTokens in your wallet stays the same. Please note: each user has the same iToken exchange rate for the same underlying token.

For example, when a token market (ex. ETH) is launched, the iToken exchange rate (how much ETH one iETH is worth) begins at 1 — and increases at a rate equal to the compounding market interest rate. For example, after one year, the exchange rate might equal to 1.01415.

## How to view my iTokens?

While Pawnfi front end only displays your supplied/ borrowed tokens, iTokens will be visible on [Etherscan](https://etherscan.io/tokens/label/compound), and you should be able to view them in the list of tokens associated with your address.

iToken balance has been integrated into multiple web3 browser wallets. You can easily check the balance on MetaMask, Coinbase Wallet and so forth.

## Can I transfer iTokens?

Yes but, please note that transferring iTokens means you’re transferring your balance of the underlying token inside the Pawnfi protocol. That is, sending an iToken to others will decrease your balance (supplied amount) , and the recipient will see his/ her balance increase.

An iToken transfer will fail if you have borrowings against the underlying token and the transfer would have put the account into a state of negative liquidity.

## iToken Staking

There is an active mining design that iToken holders can stake them in corresponding gauge pools to mine $PAWN rewards. Please see more details in [Incentive Mechanism](/pawn-token/incentive-mechanism#active-mining-via-staking-itoken).

However, please keep in mind the following:

1. Staking iToken does not guarantee incentives - the final distribution will be based on Gauge Voting and Gauge Weight. Please see more details in [Gauge Voting](/pawn-token/voting-power/gauge-voting).
2. Staking iToken will lower borrow limit, increasing borrow limit used. Please manage your own risk accordingly when you are a borrower (borrower will also receive iToken when supplying tokens as collaterals).
3. Staking iToken will temporarily decrease supply balance on your position (that is why your borrow limit will be lowered). However, you are still earning interest through the iToken's exchange rate, which increases in value dependent on the underlying token. Overall, staking iToken WILL NOT lower your interest income as a supplier.


# P-Token List

<table><thead><tr><th width="238">NFT Collection</th><th width="251">NFT Address</th><th>P-Token Symbol</th><th>P-Token Address</th></tr></thead><tbody><tr><td>Bored Ape Yacht Club</td><td>0xBC4CA0EdA7647A8aB7C2061c2E118A18a936f13D</td><td>P-BAYC</td><td>0x5f0A4a59C8B39CDdBCf0C683a6374655b4f5D76e</td></tr><tr><td>Mutant Ape Yacht Club</td><td>0x60E4d786628Fea6478F785A6d7e704777c86a7c6</td><td>P-MAYC</td><td>0x7d0B6fB139408Af77f1c5bfdc8BD9166F5901304</td></tr><tr><td>Bored Ape Kennel Club</td><td>0xba30E5F9Bb24caa003E9f2f0497Ad287FDF95623</td><td>P-BAKC</td><td>0x23012599f9ABBA61Cb1A62D3785af7E434F692C6</td></tr><tr><td>Otherside Koda</td><td>0xe012baf811cf9c05c408e879c399960d1f305903</td><td>P-KODA</td><td>0x7514799CB447752D145b6D176a453F59375b2eE8</td></tr><tr><td>Wrapped Cryptopunks</td><td>0xb7F7F6C52F2e2fdb1963Eab30438024864c313F6</td><td>P-WPUNKS</td><td>0x32EcC1de70dCeCeEB5b745e9a039a12bA6ae7F42</td></tr><tr><td>Azuki</td><td>0xed5af388653567af2f388e6224dc7c4b3241c544</td><td>P-AZUKI</td><td>0x5eEAEF7D88D805AD080Bc6F8Fe5c22F4F0c4a7D2</td></tr><tr><td>Otherdeed Expanded</td><td>0x790b2cf29ed4f310bf7641f013c65d4560d28371</td><td>P-EXP</td><td>0x27e49962E2C8Ffd7cb7b4501fc2D967a1ec2ee7d</td></tr><tr><td>CLONE X</td><td>0x49cF6f5d44E70224e2E23fDcdd2C053F30aDA28B</td><td>P-CloneX</td><td>0x25d6fe0d7bFB59924F08027eDA334073A552A400</td></tr></tbody></table>


# P-Token Collections

<figure><img src="/files/t7aHc2fiiWgRUBETklfb" alt=""><figcaption></figcaption></figure>

<table><thead><tr><th width="250">P-Token Collections</th><th width="155.33333333333331">Lending Market</th><th width="139">Leverage &#x26; Consignment</th><th width="129">Flash Trade</th><th width="132.66666666666674">NFT Marketplace</th></tr></thead><tbody><tr><td>Bored Ape Yacht Club</td><td>V</td><td>V</td><td>V</td><td>V</td></tr><tr><td>Mutant Ape Yacht Club</td><td>V</td><td>V</td><td>V</td><td>V</td></tr><tr><td>Bored Ape Kennel Club</td><td>V</td><td>V</td><td>V</td><td>V</td></tr><tr><td>Otherside Koda</td><td></td><td>V</td><td>V</td><td>V</td></tr><tr><td>Wrapped Cryptopunks</td><td></td><td>V</td><td>V</td><td>V</td></tr><tr><td>Azuki</td><td>V</td><td>V</td><td>V</td><td>V</td></tr><tr><td>Otherdeed Expanded</td><td></td><td>V</td><td>V</td><td>V</td></tr><tr><td>CLONE X</td><td></td><td>V</td><td>V</td><td>V</td></tr></tbody></table>


# Risk Framework

As Decentralized finance (DeFi) is gaining more traction, the industry is posing some risks to operating cross-border through open protocols. Pawnfi bewares of security issues and has deployed root and branch risk management.

Besides agent-based audits, e.g. PeckShield, Pawnfi has been forming a risk assessment model, to provide empirical support against malicious patterns and extreme conditions in the protocol. In the meantime, Pawnfi introduces sophisticated risk parameters to ensure a higher level of protection for all users.

The following documentation will specify the potential risks emerging in the lending market, and how Pawnfi will address them correspondingly.


# Lending Market Asset Risk

The composability of the DeFi ecosystem implies risks from an individual component flow into all dependent systems. Tokens are at the heart of Pawnfi protocol as they enable operations and cash flow, and lay the foundation for assets/ liabilities structure of the whole financial system.&#x20;

This documentation, composed by Pawnfi Risk Management Team, focuses on the risk assessment for tokens supported on Pawnfi. The risk assessment takes market, counter-party and smart contract risks for the tokens listed by Pawnfi protocol into consideration, aiming to set up the highest risk standard within DeFi.


# From Risks to Risk Parameters

For each asset, or token, it has its own market risk that profiles its price uncertainty. Even though there is no unique classification applied to DeFi, the most commonly used types of market risk are:

1. Liquidity
2. Volatility
3. Market Capitalization

## **Liquidity**

Liquidity is yoked to the market volume. It is a vital factor that incurs liquidation. The risks can be mitigated with several liquidation parameters, e.g. the protocol will provide higher incentives when the liquidity level gets lower.

## Volatility

The price change of collateral heavily driven by Volatility will influence the overall solvency of the protocol. When the collateral value falls below the amount of borrowing, additional levels of liability coverage are required. For example, **Collateral Factor** will decide at which point liquidation process will occur, and whether a liquidator can get profits from repaying the loan.

Assets with higher volatility like Altcoins usually have lower Collateral Factors, driving smaller borrowers' borrow limit and buffer zone for price drop, which are prone to trigger liquidations. The counter example are the less volatile assets like ETH, stable coins and other mainstream coins, which have the higher Collateral Factors and allow borrowers to borrow more against them.

## **Market Capitalization**

Market capitalization illustrates the size of the market. When collaterals are liquidated, market cap is a key factor to be considered as it affects liquidation parameters: the smaller the market cap, the higher the incentives.

Overall risk, or systemic risk, is the integration of liquidity, volatility and market capitalization. Overall risk is a major element to affect reserve factor.

## Overall Risk

The overall risk (systematic risk) derives from three primary sources of risk, i.e. Liquidity, Volatility, Market Capitalization, thereby implying key risks within the protocol, which has a direct impact on Reserve Factor.


# Risk Parameters

Each asset in Pawnfi has specific values related to their risk, which influences the process of how they are supplied and borrowed. Risk parameters will be routinely reviewed and set up accordingly with varying market condition or DAO governance.

## Detailed Risk Parameters Analysis

The risk parameters are used to provide referral criteria for the management of currency risks in Pawnfi protocol. Given the volatility of digital assets, margin would be reserved amid market downturn in each borrowing case. If the value of the collateral slips under a threshold, part of it could be forced into auction to repay the debt, while the rest position would remain collateralized.

### Collaterals

In DeFi, assets can be roughly categorized into two types: centralized tokens around single authorities, like USDT, USDC, WBTC, alt coins... etc., and fully decentralized tokens like ETH , AMPL... etc. When deciding a centralized asset to be placed as collateral, Pawnfi will identify whether the underlying asset is vulnerable to the risks in regard with lack of transparency, counterparty risks, and a 'single-point of failure' governance model; as for decentralized token, Pawnfi will look into whether it is highly exposed to risks of stability in decentralized conditions.&#x20;

That is, when some assets are to be supplied to earn interest in Pawnfi, their risks will be mitigated for not being used as collateral. Therefore, these assets can serve as reliant factor to measure the risks in the protocol.

### Collateral Factor

Collateral Factor can also be understood as Loan-to-Value (LTV).  It determines the upper limit of amount that can be borrowed against a collateral. A 75% collateral factor means borrowers who have 1 ETH position can borrow a 0.75 ETH worth of corresponding currency. Collateral factor will go along with the market and evolve when Pawnfi Protocol matures.

### **Liquidation Bonus**

Pawnfi places a bonus on liquidations which goes to liquidators to keep the system solvent. In a borrower's default case, the collateral will be sold at a discount to liquidators for paying back a loan subject to liquidation process. Currently in Pawnfi, the discount is 8% for every token. However, liquidation bonus might have different setup for specific token due to market condition change or DAO governance.

See [Liquidation](/risk/risk-framework/liquidation) for more details on how Pawnfi rewards liquidators.

### Reserve Factor

The reserve factor is the protocol's deposit to safeguard its overall sustainability. It mainly derives from borrowers' paid interests, and can be used as incentives for protocol governance and risk premium to protect all suppliers. Volatility is the clincher to decide reserve factors: the more volatile the assets, the higher the reserve factor.

Reserve factors will stimulate the growth of borrowing demand, which will increase the protocol's reserves, and supply market liquidity. The reserve factor won’t make immediate difference to the whole protocol if compared with making changes to collateral factor, etc., hence a multivariate system will form to further mitigate market risks.

## Latest Risk Parameter Setup

The table below shows a summary of the latest values.

<table><thead><tr><th width="240">Name</th><th width="124">Symbol</th><th width="115">Collateral</th><th width="145">Collateral Factor</th><th width="173">Liquidation Bonus</th><th width="145">Protocol Seize Share</th><th width="154">Reserve Factor</th></tr></thead><tbody><tr><td><strong>Mainstream Coins</strong></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Tether USD</td><td>USDT</td><td>Yes</td><td>82%</td><td>8%</td><td>2.8%</td><td>7.5%</td></tr><tr><td>USD Coin</td><td>USDC</td><td>Yes</td><td>85%</td><td>8%</td><td>2.8%</td><td>7.5%</td></tr><tr><td>DAI</td><td>DAI</td><td>Yes</td><td>83%</td><td>8%</td><td>2.8%</td><td>15%</td></tr><tr><td>Ethereum</td><td>ETH</td><td>Yes</td><td>82%</td><td>8%</td><td>2.8%</td><td>20%</td></tr><tr><td>Wrapped BTC</td><td>WBTC</td><td>Yes</td><td>70%</td><td>8%</td><td>2.8%</td><td>20%</td></tr><tr><td>Lido Staked Ethereum</td><td>stETH</td><td>Yes</td><td>75%</td><td>8%</td><td>2.8%</td><td>20%</td></tr><tr><td>Staked Ape Coin</td><td>sAPE</td><td>Yes</td><td>60%</td><td>8%</td><td>2.8%</td><td>N/A</td></tr><tr><td><strong>P-Token</strong></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Bored Ape Yacht Club</td><td>P-BAYC</td><td>Yes</td><td>70%</td><td>8%</td><td>2.8%</td><td>20%</td></tr><tr><td>Mutant Ape Yacht Club</td><td>P-MAYC</td><td>Yes</td><td>70%</td><td>8%</td><td>2.8%</td><td>20%</td></tr><tr><td>Bored Ape Kennel Club</td><td>P-BAKC</td><td>Yes</td><td>60%</td><td>8%</td><td>2.8%</td><td>20%</td></tr><tr><td>Azuki</td><td>P-AZUKI</td><td>Yes</td><td>65%</td><td>8%</td><td>2.8%</td><td>20%</td></tr></tbody></table>

The table above projects the asset risk assessment subject to security, governance and the markets. Tokens with security concerns around their smart contract won't be accepted by Pawnfi protocol since these risks are unlikely to control. Similarly, tokens with high risk exposure to single counter-parties cannot be supplied as collateral.


# Lending Market Liquidity Risk

The Pawnfi Lending Market is a decentralized, cross-margin market that enables the supplying and borrowing of different tokens from liquidity pools, and earning interest on assets supplied.

The liquidity of the market is measured by the availability of assets for basic market operations such as borrowing assets backed by collateral and claiming supplied assets along with accrued yield. It is a key metric, as a lack of liquidity will hinder operations.

At any point in time, the liquidity of the market can be assessed through the utilization ratio (i.e., the share of reserve that is currently borrowed versus the supply of each asset) across different tokens. To maximize the liquidity of the protocol and at the same time optimize capital efficiency, interest rate model will serve as an ideal regulator.


# Utilization

Each token liquidity is characterized by its utilization rate $$U$$ :

&#x20;$$U \hspace{1mm} = \hspace{1mm} Total Borrow \hspace{2mm} / \hspace{2mm}Total  Supply$$&#x20;

$$U$$monitors which share of the total supplied capital is borrowed at time $$t$$.

As $$U$$gets closer to 100%, the capital becomes scarcer until no more supplied asset is available. This situation can be problematic if suppliers wish to withdraw their liquidity, but no funds are available. Please note that though it is the scarcest case, it is possible utilization rate is greater than 100% as platform reserve will be open for borrowing, but will not be included in Total Supply calculation.&#x20;

Still, high utilization results in high returns for suppliers. It's therefore essential to maximize utilization while protecting liquidity.

All of the token markets are calibrated around an optimal utilization rate $$U\_{optimal}$$ (which we call "Kink") that reflects market conditions. It is presented in Pawnfi's interest rate model.


# Interest Rate Model

Pawnfi’s interest rate strategy is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates come from the Utilization Rate U.

U is an indicator of the availability of capital in the pool. The interest rate model is used to manage liquidity risk through allocating user incentivizes to support liquidity:

* When capital is sufficient: low interest rates to encourage loans.
* When capital is scarce: high interest rates to encourage repayments for loans and additional supplies.

## **Normal Model**

The supplying rate's calculation depends on something called an **interest rate model** — the algorithmic model to determine a money market's demand and supply rates.

This interest rate model takes in two parameters:

* Base rate per year, the minimum borrowing rate
* Multiplier per year, the rate of increase in interest rate with respect to utilization

**Borrow Rate**

\= Base + Multiplier x Utilization Rate

**Supply Rate**

\= Borrow Rate x (1-Reserve Factor) x Utilization Rate

## Jump Rate Model

Liquidity risk materializes when utilization is high, its becomes more problematic as U gets closer to 100%. To tailor the model to this constraint, some markets follow what is known as the "Jump Rate model”. This model has the standard parameters:

* Base rate per year, the minimum demand rate
* Multiplier per year, the rate of increase in interest rate with respect to utilization

but it also introduces two new parameters:

* Kink, the point in the model in which the model follows the jump multiplier
* Jump Multiplier per year, the rate of increase in interest rate with respect to utilization after the "Kink"

**Borrow Rate**

\= Base + Multiplier x Min(Utilization Rate, Kink) + Jump Multiplier x Max(Utilization Rate - Kink, 0)

**Supply Rate**

\= Borrow Rate x (1-Reserve Factor) x Utilization Rate

{% hint style="info" %}
Currently all the token markets are designed as Jump Rate Model.
{% endhint %}

## Latest Interest Rate Table

<table><thead><tr><th width="222">Name</th><th>Symbol</th><th width="184">Interest Rate Model</th><th>Base</th><th width="109">Multiplier</th><th>Kink</th><th width="107">Jump Multiplier</th><th>Reserve Factor</th></tr></thead><tbody><tr><td><strong>Mainstream Coins</strong></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Tether USD</td><td>USDT</td><td>Jump Rate Model</td><td>0%</td><td>5%</td><td>80%</td><td>109%</td><td>7.5%</td></tr><tr><td>USD Coin</td><td>USDC</td><td>Jump Rate Model</td><td>0%</td><td>5%</td><td>80%</td><td>109%</td><td>7.5%</td></tr><tr><td>DAI</td><td>DAI</td><td>Jump Rate Model</td><td>0%</td><td>5%</td><td>80%</td><td>109%</td><td>15%</td></tr><tr><td>Ethereum</td><td>ETH</td><td>Jump Rate Model</td><td>2%</td><td>18%</td><td>80%</td><td>100%</td><td>20%</td></tr><tr><td>Wrapped BTC</td><td>WBTC</td><td>Jump Rate Model</td><td>2%</td><td>22.5%</td><td>80%</td><td>100%</td><td>20%</td></tr><tr><td>Lido Staked Ethereum</td><td>stETH</td><td>Jump Rate Model</td><td>2%</td><td>18%</td><td>75%</td><td>100%</td><td>20%</td></tr><tr><td>Staked Ape Coin</td><td>sAPE</td><td>N/A</td><td>N/A</td><td>N/A</td><td>N/A</td><td>N/A</td><td>N/A</td></tr><tr><td><strong>P-Tokens</strong></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Bored Ape Yacht Club</td><td>P-BAYC</td><td>Jump Rate Model</td><td>2%</td><td>22.5%</td><td>70%</td><td>150%</td><td>20%</td></tr><tr><td>Mutant Ape Yacht Club</td><td>P-MAYC</td><td>Jump Rate Model</td><td>2%</td><td>22.5%</td><td>70%</td><td>150%</td><td>20%</td></tr><tr><td>Bored Ape Kennel Club</td><td>P-BAKC</td><td>Jump Rate Model</td><td>2%</td><td>22.5%</td><td>70%</td><td>150%</td><td>20%</td></tr><tr><td>Azuki</td><td>P-AZUKI</td><td>Jump Rate Model</td><td>2%</td><td>22.5%</td><td>70%</td><td>150%</td><td>20%</td></tr></tbody></table>


# Protocol Math

## Calculating Accrued Interest <a href="#calculating-accrued-interest" id="calculating-accrued-interest"></a>

Interest rates for each market update on any block in which the ratio of borrowed assets to supplied assets in the market has changed. The amount interest rates are changed depends on the interest rate model smart contract implemented for the market, and the amount of change in the ratio of borrowed assets to supplied assets in the market.

Here is an example of borrow interest accrual:

Alice borrows 1 ETH from Panwfi Lending Market. At the time of borrow, the borrow interest is 0.000000000037893605 ETH per block. No one interacts with the iEther contract for 3 Ethereum blocks. On the subsequent 4th block, Bob borrows some ETH. Alice’s underlying balance is now 1.000000000151574420 ETH (which is 0.000000000037893605 times 4 blocks, plus the original 1 ETH). Alice’s underlying ETH balance in subsequent blocks will have interest accrued based on the new value of 1.000000000151574420 ETH instead of the initial 1 ETH. Note that the borrow rate per block value may change at any time.

That is, the interest will only be compounded whenever there is an interaction with each market. If there is no interaction with the market (let's say USDT), the supply and borrow APY for USDT will be calculated as simple interest.&#x20;

## Calculating the front-end APY Using Rate Per Block <a href="#calculating-the-apy-using-rate-per-block" id="calculating-the-apy-using-rate-per-block"></a>

The Annual Percentage Yield (APY) for supplying or borrowing displaying in each market can be calculated using the value of supply or borrow APY in smart contract with this formula:

```solidity
Rate = APY; // rate in smart contract
Blocks Per Year = 2102400
Blocks Per Day = 6570 (13.5 seconds per block)
Days Per Year = 365

APY = ((((Rate / Blocks Per Year * Blocks Per Day + 1) ^ Days Per Year)) - 1) * 100
```


# Liquidation

## NFT Leverage

At Pawnfi, we understand that borrowers may be vulnerable to liquidation risks caused by price volatility during the loan period. That's why we designed our NFT Leverage module to eliminate this risk. As a result, when borrowers borrow P-Token against their NFT, they can rest assured that they won't be liquidated due to market fluctuations during the loan period.

If borrowers repay the calculated P-Token amount before the loan expiration date, they can retrieve their NFT. However, if they miss the deadline, they will enter a grace period before liquidation. The grace period is equal to the loan duration multiplied by 0.2. For example, if the loan duration is 30 days, the borrower has until the 36th day to repay the loan before liquidation occurs. Please note that interest will still accrue during the grace period.

At Pawnfi, we prioritize the security and convenience of our users. Our NFT Leverage module offers flexible loan terms and eliminates the risk of liquidation, making it a reliable option for borrowers looking to leverage their NFTs.

The liquidated NFT will be directly sent to "NFT Vault" for trading. See [Flash Trade](/getting-started/understanding-pawnfi/pawnfi-modules/flash-trade) for more details.

## Consignment

Consignment has the same liquidation logic as NFT Leverage. Sellers must pay back the upfront payment and custody fee before the grace period ends.

The consigned NFT will also be liquidated if the seller does not pay back on time, and it will be directly sent to "NFT Vault" for trading.

<figure><img src="/files/YyQJigs7MpkVrgv0mgZR" alt=""><figcaption></figcaption></figure>

<figure><img src="/files/TDEANHhQSMjwJsSvuQdN" alt=""><figcaption></figcaption></figure>

## Lending Market

For each user/ account, liquidation can be triggered when Borrow Limit Used exceeds 100%.

{% hint style="info" %}
Borrow Limit Used = Outstanding Debt in USD/ Borrow Limit in USD x 100%
{% endhint %}

{% hint style="info" %}
Borrow Limit = Σ Amount of **Token i** x Price of **Token i** x Collateral Factor of **Token i**
{% endhint %}

At Pawnfi, anyone can trigger liquidation to ensure the integrity of our platform. When liquidation is triggered, liquidators can help repay any borrowed tokens. However, to protect borrowers from losing all their positions, we limit the amount that can be liquidated to 50% of their debt.

Liquidators can choose any borrower's collateral and receive an additional value as a liquidator's reward for repaying the debt. However, it's important to note that 2.8% of the seized collateral value will go to the platform's reserve as a liquidation penalty. Therefore, for each $100 worth of debt cleared, $108 worth of collateral/supplied assets will be deducted from the borrower's account and become exclusive benefits for liquidators and the platform.

<figure><img src="/files/jJQPz9hcxtviNIBufs4S" alt=""><figcaption></figcaption></figure>

### Scenario of Supplying NFT

If a borrower uses NFT as collateral and it's circulating in the corresponding P-Token format, they won't immediately lose the NFT if liquidation occurs. Instead, they can still withdraw their NFT after topping up the corresponding P-Token.

However, the borrower's NFT will still be liquidated if the position falls below the threshold. At Pawnfi, we prioritize the security and convenience of our users, which is why we designed our platform to protect borrowers from losing their collateral immediately in case of liquidation.

{% hint style="info" %}
Corresponding P-Token position < \[(Supplied NFT amount x 1000) - 700]
{% endhint %}

When liquidating NFTs, we prioritize borrowers' preferences by following the order they customize in our interface. The liquidation process will pause if the P-Token position exceeds \[(Supplied NFT amount x 1000) - 700]. After that, liquidated NFTs will be sent directly to the "NFT Vault" for trading.

Here is an example:

1. Alice supplied 2 BYAC (X and Y) as collateral to borrow a certain amount of ETH.
2. 2 BAYC is protected in Pawnfi Protocol's smart contract, and there are 2,000 P-BAYC showing on Alice's position.
3. If Alice gets liquidated and there are only 1,500 P-BAYC in her position, she will not lose her NFT at this moment because **1,500 > 2 x 1,000 - 700 = 1,300**&#x20;
4. However, she can only withdraw 1 BAYC because she needs more P-BAYC to withdraw both. She will need to top up 500 P-BAYC to withdraw the remaining one.
5. That is to say, if liquidation happens again and there are only 1,100 P-BAYC on her position, if she placed X as the first order, X would be liquidated and sent to "NFT Vault." Y will not be liquidated as now 1,100 > 1 x 1,000 - 700.
6. Even though BYAC is liquidated, Alice can still use the remaining P-BAYC as collateral or even withdraw to trade elsewhere.
7. One thing different about Pawnfi is that even liquidation status cannot be rolled back, there is a likelihood that borrowers could retrieve their NFTs within Pawnfi. As all liquidated NFTs will be directly sent to NFT Vault, borrowers can interact with Flash Trade, where they will be offered a chance to get back the original NFT with 1:1000 P-Tokens.

<figure><img src="/files/OnO6D6KxpSip7Uwm0NXi" alt=""><figcaption></figcaption></figure>


# Price Oracle

How Pawnfi gets token price for Cross-Margin Lending Market

Similar to Aave and Compound, Pawnfi Non-Custodial Lending Market relies heavily on oracle price feeding to provide the real-time price reference for underlying tokens. These prices are related to collateral value, borrowing amount, and when to trigger liquidations.

## P-Token Price Feeding

By design, P-Token price should come directly from **Uniswap Oracle** based on its trading behavior. However, due to the possible low trading volume and liquidity at the beginning of P-Token coming up in the market, it makes sense to have a proxy mechanism to serve as a P-Token price reference in Pawnfi Lending Market.

In Pawnfi, one NFT always equals 1,000 corresponding P-Token (please see [Key Vehicle: P-Token](/getting-started/understanding-pawnfi/pawnfi-modules/p-token) for more information). That is, the underlying NFT floor Price will be the best proxy of the P-Token price. Specifically, in the beginning, use **Chainlink's NFT Price Oracle** as a core enhancement and safety-focused primitive for proxy price feed for P-Token in Lending Market. For some NFTs that haven't been supported by Chainlink, Pawnfi will rely on **Pawnfi NFT oracle** to fetch NFT floor price from [OpenSea](http://opensea.io), [LooksRare](https://looksrare.org/), [X2Y2](https://x2y2.io/) and other trading markets. Gradually, when the P-Token market becomes more mature, Pawnfi will put more weight on Uniswap Oracle to provide the most accurate P-Token price.

{% hint style="info" %}
**P-Token Price = X% x Oracle Price/1,000 + (1-X%) x Uniswap Oracle Price**
{% endhint %}

Pawnfi NFT oracle design and running mechanism:

1. The off-chain node obtains the raw floor price of NFTs from OpenSea, LooksRare, X2Y2 and other trading markets;
2. Filter the raw floor price data, such as driving out outliers;
3. Calculate the floor price according to a pre-defined formula: X\*OpenSea floor price + Y\*LooksRare floor price + Z\*X2Y2 floor price + K\*Other trading markets;
4. Calculate the time-weighted average price (TWAP) off-chain to weight the floor price within certain time frame, and call the contract interface to upload the floor price to the on-chain contract;
5. On-chain contract will perform another time-weighted average to weight the floor price, ensuring the final price feed is reasonable;
6. After dividing the final price feed by 1,000, we will get the P-Token price from Pawnfi NFT oracle.

<figure><img src="/files/8bMLTJgjWCHtIhoxpPUb" alt=""><figcaption></figcaption></figure>

## NFT/ P-Token  Price Feeding

| NFT (P-Token)         | Price Feed                       |
| --------------------- | -------------------------------- |
| Bored Ape Yacht Club  | **Chainlink's NFT Price Oracle** |
| Mutant Ape Yacht Club | **Chainlink's NFT Price Oracle** |
| Bored Ape Kennel Club | **Pawnfi NFT Oracle**            |
| Azuki                 | **Chainlink's NFT Price Oracle** |

## Other ERC-20 Token Price Feeding

For the following tokens, we use price feed provided by Chainlink:

* ETH
* WBTC
* USDT
* USDC
* DAI
* stETH

## sAPE Price Feeding&#x20;

In the case of sAPE, which represents staked APE within the Pawnfi APE Pool, our approach to obtaining its price feed differs.&#x20;

1. Initially, we utilize the APE price feed supplied by Chainlink.&#x20;
2. Subsequently, we apply the exchange rate between APE and sAPE to ascertain the final sAPE price.

Please note: The generation of sAPE is similar to [iToken](/getting-started/understanding-pawnfi/interest-bearing-token-itoken) in Pawnfi lending market. sAPE accrues interest through their exchange rate — over time, each sAPE becomes convertible into an increasing amount of APE supplied in Pawnfi APE Pool, even while the amount of sAPE in your wallet stays the same.&#x20;

## More on **Chainlink's NFT Price Oracle**

As a trusted provider of reliable price oracles for leading DeFi and crypto protocols, Chainlink has facilitated over **$6.7 Trillion** in transactions. [Chainlink Labs and Coinbase](https://www.coinbase.com/blog/coinbase-cloud-teams-up-with-chainlink-labs-to-launch-nft-floor-pricing) have recently filled a crucial void in the NFT-Fi sector by launching their first [NFT Floor Price oracle feeds](https://docs.chain.link/data-feeds/nft-floor-price/). Despite some limitations, these NFT Collection Floor Prices provide a sturdy foundation for NFT borrowing and lending, as affirmed by our research.&#x20;

We’re excited to announce that Pawnfi has integrated Chainlink to help access accurate and reliable NFT floor price data for leading NFT collections. By integrating the decentralized oracle network, Pawnfi has access to high-quality, tamper-proof NFT floor price information needed to conduct collateral calculation on a more accurate and fair basis so as to secure user's rights and interests.

**About Chainlink**

Chainlink is the industry-standard Web3 services platform that has enabled trillions of dollars in transaction volume across DeFi, insurance, gaming, NFTs, and other major industries. As the leading decentralized oracle network, Chainlink enables developers to build feature-rich Web3 applications with seamless access to real-world data and off-chain computation across any blockchain and provides global enterprises with a universal gateway to all blockchains.

Learn more about Chainlink by visiting [chain.link](https://chain.link/?utm_medium=referral\&utm_source=press-release) or reading the developer documentation at [docs.chain.link](https://docs.chain.link/?utm_medium=referral\&utm_source=press-release).

<br>

<br>


# Understanding $PAWN

$PAWN is the governance and utility token for Pawnfi Protocol. As an essence of Pawnfi DAO, the ma~~i~~n purposes of $PAWN token are designed to incentivize liquidity contributors on the Pawnfi platform as well as engaging as many long-term supporters as possible in the governance of the protocol.

Liquidity providers on the Pawnfi platform receive $PAWN for build-up of liquidity. This ensures that the protocol is able to continue offering loans and enough liquidity. For more information on the providers' reward, see [Incentive Mechanism](/pawn-token/incentive-mechanism).

With time-weighted voting and value accrual mechanisms, $PAWN currently has three main use cases: voting, boosting and earning safety incentives. These three things will require you to place your $PAWN in Pawnfi SAFE and acquire voting power.

{% hint style="info" %}
Voting power are your $PAWN placed in SAFE - it is one of the most important and exciting incentives to hold $PAWN token. By placing $PAWN in SAFE for a period of time, it will not only boost your token reward, but maximize your revenue on the Pawnfi platform.

See [Voting Power](/pawn-token/voting-power) for more information.
{% endhint %}

## Earning Safety Incentives (share platform fee)

$PAWN can be placed in Pawnfi SAFE to get voting power. It is a community-led proposal introduced an up to 50% distribution on all platform fee from Lending Market, which are then distributed to voting power holders.

For more information on the Boosting, see [Safety Incentives Mechanism](/pawn-token/voting-power/safety-incentives-mechanism).

## Boosting

One of the main incentive for holding $PAWN is the ability to boost your rewards on provided liquidity. Placing $PAWN in SAFE allows you to acquire voting power to participate in the DAO and earn a boost of up to 2.5x on the liquidity you are providing on Pawnfi.

For more information on the Boosting, see [Boosting your $PAWN Rewards](/pawn-token/voting-power/boosting-your-pawn-rewards).

## Voting

Once $PAWN holders obtain voting power, they can start voting on gauge weight, various DAO proposals and pool parameters.

## $PAWN is NOT claimable yet

To align with the Token Generation Event (TGE) timeline on DEX/CEX platforms, all the $PAWN rewards earned through Pawnfi modules, though visible and trackable, will be claimable at a later date. Rest assured, we will promptly notify you via our official social media channels when the rewards become accessible. We appreciate your understanding and support as we work towards creating a seamless experience on Pawnfi.


# Incentive Policies

Liquidity Incentives will be open in near future

Protocols are competing for liquidity by incentivizing contributors through the means of **protocol tokens issuance**. The Pawnfi Protocol will also incentivize our users through a scheduled distribution to benefit liquidity providers and users through the Protocol Ecosystem Incentives from Pawnfi Reserve.&#x20;

### **Initial Design of Pawnfi Reserve Usage**

Pawnfi Reserve will be mainly made up of two parts: $PAWN token and Lending Market Reserve.  The distribution of these reserves to the ecosystem by incentive policies will be voted and can be amended by Voting Power holders. From our initial design, those incentives will notably include:

* Pawnfi Liquidity Incentives (in $PAWN)
* Pawnfi Safety Incentives (in Lending Market Reserve)

This initial design of reserve allocation through the Ecosystem Incentives and Safety Incentives is the most direct way to distribute governance power to the users while bootstrapping the liquidity and safety of the protocol.

### Lending Market Reserve

In Pawnfi Lending Market, there will be the reserve factor based upon which a share of the lending protocol's interests will be reserved in a collector contract for the ecosystem. This reserve will be used to sustain the DAO, stabilize Pawnfi Lending Market and pay protocol contributors. It is made out of various assets including $PAWN.

Please see [Risk Parameters](/risk/risk-framework/lending-market-asset-risk/risk-parameters) for more information on reserve factor.


# Borrow Distribution (Passive Liquidity Incentives)

Liquidity Incentives will be open in near future

Every Pawnfi user accrues $PAWN for each block they are borrowing from the lending market. The "PAWN speed" unique to each lending market is a factor that specifies the amount of $PAWN that is distributed, per block, to borrowers in each market. This number might be changed for individual markets based on the market condition or through a successful Pawnfi Governance proposal.

Note that not every market has $PAWN distributed to its participants. Below dynamic table shows the current distribution of passive mining among different lending pools.

<table><thead><tr><th width="182">Pool</th><th>Monthly $PAWN Distribution</th></tr></thead><tbody><tr><td>ETH</td><td>To Be Updated</td></tr><tr><td>USDT</td><td>To Be Updated</td></tr><tr><td>USDC</td><td>To Be Updated</td></tr><tr><td>DAI</td><td>To Be Updated</td></tr><tr><td>WBTC</td><td>To Be Updated</td></tr><tr><td>P-BAYC</td><td>To Be Updated</td></tr><tr><td>P-MAYC</td><td>To Be Updated</td></tr><tr><td>P-BAKC</td><td>To Be Updated</td></tr><tr><td>P-AZUKI</td><td>To Be Updated</td></tr></tbody></table>


# Liquidity Mining (Active Liquidity Incentives)

Liquidity Incentives will be open in near future

It is a governmental process to leave iToken holders compete for $PAWN token reward. By staking iToken to specific gauge and perform [Gauge Voting](/pawn-token/voting-power/gauge-voting) with voting power, each lending pool has a chance to win all the weekly active reward.

Note that participants will need to stake his/ her iToken in the gauge (each lending pool will have its corresponding gauge) to earn liquidity mining reward. Also it is not guaranteed that every gauge will be distributed with incentives - while the total amount is based on the market condition or through a successful Pawnfi Governance proposal, the distribution is based on the result of weekly gauge voting. That is, with 0 voting, a gauge with the most liquidity may still be earning 0 $PAWN!

For liquidity mining, there is also a boosting mechanism to amplify users $PAWN token reward. See [Boosting your $PAWN Rewards](/pawn-token/voting-power/boosting-your-pawn-rewards) for more information.

<figure><img src="/files/nVEoyGAzs9ycWy5GppEm" alt=""><figcaption></figcaption></figure>

## Important things to know about staking iToken:

There is no safety issue staking iToken, but please exercise caution! By staking iTokens, you’re temporarily transferring your balance of the underlying asset to a specific gauge. As a borrower, if you stake the iToken, which the underlying has been enabled as collateral, it will lower your Borrow Limit and make you more vulnerable to liquidation.

However, as a pure supplier, there is zero risk as you are not borrowing anything, and iTokens will keep accruing interest for you through their exchange rate. When you unstake your iTokens, the amount will not change. Still, they become convertible into an increasing amount of their underlying token.


# Platform Fee Distribution (Safety Incentives)

Liquidity Incentives will be open in near future

The Pawnfi lending contracts have designed to charge a portion of borrow rate as service fee, that is the Pawnfi platform fee, which will be partially distributed to the voting power holders. The service fee is determined by the Reserve Factor and Borrow Rate of each pools, which are the results of risk parameter setting and utilization rate.

For borrowing the fee is taken in the borrowed token and calculated against the final amount received. For example, if the borrowed token is ETH, the fee is taken in **ETH**. As Pawnfi lending market is consisted of multiple pools, service fee will also include several tokens (ex. ETH/ USDT/ DAI/ P-Token ... etc.)

See [Safety Incentives Mechanism](/pawn-token/voting-power/safety-incentives-mechanism) for more information.


# Voting Power

To vote in governance, compete in Liquidity Mining and boost liquidity rewards, users need to place their $PAWN token in Pawnfi SAFE to get voting power.

Voting power are your $PAWN placed in SAFE. The longer you place your $PAWN, the more voting power you have (and the bigger boost you can reach). Each PAWN placed for one year is equal to 52 voting power.&#x20;

The minimum placing time is 1 month and the maximum placing time is two years. Your voting power gradually decays every week as your placed tokens approach their expiry. The formula is outlined below:

Voting power = Place Time in weeks x Placed $PAWN amount

Voting Power decay rate = Decay at "Placed $PAWN amount" every week on Thursday at 00:00:00 UTC

<figure><img src="/files/ZQtf6DjKV6tNALvw7S0x" alt=""><figcaption></figcaption></figure>

Voting power cannot be transferred, and the only way to obtain voting power is by placing $PAWN token in SAFE.


# Pawnfi SAFE

## What is Pawnfi SAFE?

Pawnfi **Secure Asset For Ecosystem (SAFE)** is where users can place their $PAWN to gain entitlement to voting power. While voting power is the foundation of Protocol governance, placing $PAWN in SAFE will not only improve protocol-level safety but also make Pawnfi more decentralized and community-driven.

## What does it mean to place $PAWN in SAFE?

PAWN holders can place their $PAWN in SAFE to receive Voting Power. The longer you place, the more Voting Power you'll receive. Voting Power allows users on Pawnfi to:

* vote on incentive distribution between pools;
* Boost mining rewards;
* Participate in DAO governance;
* Share safety incentives (platform fee from Lending Market).

Some other things to note:

* Users can place $PAWN in SAFE several times per account.
* It is not required to vote to share safety incentives. Voting Power holders can still claim safety incentives (platform fee distribution) even if they do not vote.
* Pawnfi works in a week long epoch, starting at 00:00 Thursday, UTC, every week. This means that every week your voting power declines by one week and voting starts anew.
* There is no difference you start placing your $PAWN in SAFE on Tuesday or Wednesday - they will both decline by one week amount on Thursday at 00:00 UTC.
* Safety incentives are paid out from the previous week's fees. Every Thursday, a new balance of fees streams out to users whose $PAWN was placed in SAFE during that previous week. Please see [Safety Incentives Mechanism](/pawn-token/voting-power/safety-incentives-mechanism) for more information.

## What is a Boost?

When placing $PAWN in SAFE, you will also earn a boost on your provided liquidity of up to 2.5x. The goal is to incentivize users to participate in governance by rewarding them with a bigger share of the PAWN distribution.

For more information on Boost, see [Boosting your $PAWN Rewards](/pawn-token/voting-power/boosting-your-pawn-rewards).

## What if I supply and borrow in multiple pools?

Your voting power applies to all gauges but may produce different boosts based on how much liquidity you are contributing and how much total liquidity the pool has.

## How often does my boost records voting power changes?

Your voting weight decays over time, but your boost will take effect of your decreasing voting power at certain checkpoints like withdrawing, depositing into a gauge or minting PAWN.

For example if you start at 1000 voting power and your voting power decreases to 800, your boost will still use your original voting power of 1000 voting power until a user checkpoint.

## How can I apply my boost?

After placing $PAWN in SAFE, you need to trigger your boost on each of the gauge you're contributing liquidity in. This can be updated by depositing or withdrawing from a gauge.

For more information on the boost, see [Boosting your $PAWN Rewards](/pawn-token/voting-power/boosting-your-pawn-rewards).

## Important things to know about placing $PAWN in SAFE:

1. Placing time that are less than 52 weeks can be extended to the 52-week maximum.&#x20;
2. Expired $PAWN in SAFE must be claimed before you can withdraw your $PAWN. Released $PAWN is then streamed out over a period of 7 days. During those 7 days released $PAWN can be claimed at any time.


# Boosting your $PAWN Rewards

This guide assumes that you have already participated in lending & borrowing and that you are currently staking your iTokens in the gauge for Liquidity Mining.

One of the main incentives for $PAWN is the ability to boost your rewards on contributed liquidity. Placing $PAWN in Pawnfi SAFE allows you not only to acquire voting power to participate in the DAO, but also to earn a boost of up to 2.5x on the liquidity you are contributing to Pawnfi.

## Calculate your required boost

The first step to getting your rewards boosted is to figure out how much $PAWN you'll need to place in SAFE. All gauges have different requirements meaning some pools are easier to boost than others. It depends on how much others have placed and how much the liquidity gauge has.

You can find the calculator here: <https://app.pawnfi.com/yield/mining>

<figure><img src="/files/MOO09UHC2fFVj99KEGDI" alt=""><figcaption></figcaption></figure>

## Placing your $PAWN in SAFE

Once you know how much and how long you wish to place in SAFE, you can either visit the following page to: <https://app.pawnfi.com/yield/safe>

<figure><img src="/files/Z3Bh33r3GSVDp7cqgfD4" alt=""><figcaption></figcaption></figure>

Or you can click "UP" button to do a fast place

<figure><img src="/files/8VnXL9X9wOdvOWmxiA7P" alt=""><figcaption></figcaption></figure>

<figure><img src="/files/LTfOx2a4k5tXKs3fychw" alt=""><figcaption></figcaption></figure>

After placing your $PAWN in SAFE, you will need to update your boost.

## Updating your boost

Head over to the mining page: <https://app.pawnfi.com/yield/mining>

If you see your new boost after current boost: then you do not need to do anything else.

If your current boost hasn't moved, you can either claim $PAWN from each of the gauge you have staked iToken in, or click refresh to update your boost. After doing so, your boost should be showing.

<figure><img src="/files/0Ibr150vqJZWbiyYEZfN" alt=""><figcaption></figcaption></figure>

{% hint style="info" %}
Your boost will not be updated until you perform an operation on a gauge.
{% endhint %}

## Formula

The boost mechanism will calculate your **Earning Weight** by taking the smaller amount of two values, and this is how Pawnfi calculates weekly active mining reward for each user.&#x20;

{% hint style="info" %}
Earning Weight = Min((0.4 x Contributed Liquidity) + Total Gauge Liquidity x Voting Power/Total Voting Power x 0.6), Contributed Liquidity)&#x20;
{% endhint %}

{% hint style="info" %}
Boost = Earning Weight/ (0.4 x Contributed Liquidity)
{% endhint %}

### Weekly Active Mining Reward per user

{% hint style="info" %}
Total Weekly Distribution x Gauge Weight x Earning Weight / Total Earning Weight
{% endhint %}


# Gauge Voting

Gauge Voting is where users vote to determine the distribution of the weekly $PAWN incentives across the different lending pools. Users with Voting Power can participate in these votes which begin on Thursday at 00:00:00 UTC and end the following Wednesday at 23:59:59 UTC. When voting closes, liquidity mining rewards are split according to the vote and allocated to the pools.

Votes are reset to zero each week and the voting cycle starts again.

## How to vote?

Users with Voting Power can vote on <https://app.pawnfi.com/yield/mining> by clicking vote on the vote table for the lending pool they wish to support, filling in the amount they wish to vote and then clicking the "Confirm" button:

<figure><img src="/files/vfIbb4Swc6wnrIUSl4MC" alt=""><figcaption></figcaption></figure>

<figure><img src="/files/l6kLlPxX3DtOYPEYN4YZ" alt=""><figcaption></figcaption></figure>

## Who can perform gauge voting?

Anybody who has Voting Power can vote to direct its voting power towards one or multiple lending pools.


# Gauge Weight

Simply put, a gauge weight translates into how much of the PAWN reward each pool receives.

<figure><img src="/files/Vd06JRyINTlAvB6ZqaP6" alt=""><figcaption></figcaption></figure>

In the image above, the P-BAYC pool has 4.34% of the votes, and next week would receive 4.34% of the $PAWN incentives as a reward for contributing liquidity to that pool.

You can find each liquidity gauge relative weight on this page: <https://app.pawnfi.com/yield/mining>

## Why are gauge weights so important?

Because those weights decide where the PAWN incentive goes, it allows the community to decide where most of the liquidity should go and balance liquidity. It's a powerful tool for voters that must be used responsibly.

{% hint style="info" %}
The gauge weight is updated once a week on Thursday at 00:00:00 UTC.
{% endhint %}

## How often should I vote to govern gauge weight?

Since votes are reset to zero each week and the voting cycle starts again, you should revote every week to ensure your favorite lending pool have a higher gauge weight, and of course, higher PAWN incentives.


# Safety Incentives Mechanism

Since the first day of Pawnfi, **up to 50% of platform fee from Lending Market are distributed to voting power holders**, which we call it **Safety Incentives**. This is the result of a community-led proposal to align incentives between liquidity providers and governance participants (voting power holders).

Collected fees will be in native token format (ETH/ USDT/ P-Token...etc. from lending pools) and distributed to voting power holders. Voting power are $PAWN placed in the Pawnfi SAFE. See [Pawnfi SAFE](/pawn-token/voting-power/pawnfi-safe) for more information.

You will also obtain a boost on your provided liquidity by placing $PAWN in SAFE. See [Boosting your $PAWN Rewards](/pawn-token/voting-power/boosting-your-pawn-rewards) for more information.

## How does Safety Incentives distribution happen?

Each Epoch stands for an accrual cycle, which lasts for 7 days. That is, safety incentives are paid out from the previous week's platform fee. What's more, safety incentives are distributed at secondly basis, which means you will only be able to claim the full amount of Epoch 1 reward at the end of Epoch 2.&#x20;

For example, if user places their $PAWN in SAFE in the middle of Epoch 1, platform fee distribution will be available at the start of Epoch 2, accruing every second, for Epoch 1 safety incentives. One more thing to note: even though your voting power expires during Epoch 2, you are still able to claim the reward from Epoch 1.

| Epoch 1                                    | Epoch 2                                     | Epoch 3                                    | Epoch 4                                    |
| ------------------------------------------ | ------------------------------------------- | ------------------------------------------ | ------------------------------------------ |
| Jun 30 - July 7                            | July 7 - July 14                            | July 14 - July 21                          | July 21 - July 28                          |
| $12,000 fee share                          | $10,000 fee share                           | $15,000 fee share                          | $18,000 fee share                          |
| Alice places $PAWN in SAFE, has 100% share | Alice is able to claim $12,000 from Epoch 1 | Alice is able to claim $5,000 from Epoch 2 | Alice is able to claim $7,500 from Epoch 2 |
| 　                                          | Bob 50% share. Now Alice becomes 50% share  | Bob is able to claim $5,000 from Epoch 2   | Bob is able to claim $7,500 from Epoch 2   |


# Mega Drop

At Pawnfi, we recognize our community and users' crucial role in shaping our platform's future. Their unwavering support is invaluable, especially during the building process. Furthermore, introducing governance tokens signifies our transition towards a decentralized autonomous organization.

We're offering a reward program to express gratitude to users who continue to contribute to our protocol. Participants in this program will be eligible for governance tokens and rights, reflecting their involvement and contribution. This approach aligns with community interests and maximizes long-term value.

We're committed to providing an exceptional financial experience and incentives for our platform users. Our latest initiative, the Mega Drop event, aims to foster engagement and loyalty. This multi-wave event allows users to accumulate Mega points through trading, lending, staking, and inviting new members.

Pawnfi's management team reserves the right to make changes to the event's rules and regulations, including but not limited to amending, altering, restating, changing, or repealing them, at any time without prior notice.

## Mega Drop Event Guidelines

#### Introduction&#x20;

The Mega Drop Event is an exciting opportunity for participants to complete various missions and earn points, which can be converted into Mega Boxes containing $PAWN tokens. This event is designed to engage the community and reward users for their active participation and contributions.

#### No Maximum Limit on Missions

During the Mega Drop event, there is no maximum limit on the number of missions that each participant can complete. This encourages users to take on as many missions as possible, increasing their potential rewards.

#### Minimum Points Requirement

Points below 0.01 will not be counted towards a participant's total. For example, if an NFT is sold for 0.0001 ETH, the transaction will not earn any points. This minimum threshold ensures that only meaningful contributions are rewarded.

#### ETH Value and Reference Prices

The ETH value assigned to different missions is based on various reference prices, which will be communicated to participants in advance. These reference prices help to establish a fair and transparent reward system for all users.

#### Mega Point Conversion and Mega Boxes&#x20;

Mega Points earned during the event will be converted into Mega Boxes containing $PAWN tokens. Please note that a minimum number of Mega Points must be accumulated to receive Mega Boxes. The specific conversion rate and minimum requirement will be disclosed to participants afterwards.

#### Participation and Eligibility

To participate in the Mega Drop Event, users must complete missions and earn points while adhering to the event's rules and guidelines. Failure to comply with these rules may result in disqualification from the event.

#### Prohibited Activities and Consequences

The Pawnfi team will actively monitor for any involvement in wash trading or other fraudulent activities. If any such behavior is detected, the participant's rights to participate in the event will be revoked, and they may be disqualified from receiving rewards.

## Mission & Rules

<table><thead><tr><th width="206">Modules</th><th width="269">Missions</th><th width="280">Points</th><th width="284">Timing of points accrual</th><th width="269">Remarks</th></tr></thead><tbody><tr><td>Flash Trade</td><td>Flash trade sell</td><td><strong>10</strong> per ETH value</td><td>Transaction completed</td><td>N/A</td></tr><tr><td>Flash Trade</td><td>Flash trade buy</td><td><strong>5</strong> per ETH value</td><td>Transaction completed</td><td>N/A</td></tr><tr><td>Leverage</td><td>Leverage NFT</td><td><strong>5</strong> per ETH value</td><td>Repayment completed</td><td>Need to repay after 5 days</td></tr><tr><td>Consign</td><td>Consign NFT</td><td><strong>5</strong> per ETH value for Redemption<br><strong>10</strong> per ETH value for Sold</td><td><ol><li>Redemption completed;</li><li>Time of purchase</li></ol></td><td>For consign mission eligibility, need to list more than 1,500 P-Token. Earn points from repayment after 5 days, but no day limit applies for points earned from sales.</td></tr><tr><td>Lending Market</td><td>Supply NFT/P-Token/ ETH</td><td><strong>0.05</strong> per ETH value</td><td>Snapshot every hour</td><td>Supply points are not awarded if you borrow the same token (with a value > 0.01 ETH) that you have supplied.</td></tr><tr><td>Lending Market</td><td>Supply other tokens</td><td><strong>0.025</strong> per ETH value</td><td>Snapshot every hour</td><td>Supply points are not awarded if you borrow the same token (with a value > 0.01 ETH) that you have supplied.</td></tr><tr><td>Lending Market</td><td>Borrow P-Token/ ETH</td><td><strong>0.05</strong> per ETH value</td><td>Snapshot every hour</td><td>N/A</td></tr><tr><td>Lending Market</td><td>Borrow other tokens</td><td><strong>0.025</strong> per ETH value</td><td>Snapshot every hour</td><td>N/A</td></tr><tr><td>Liquidity Boosting</td><td>Commit liquidity</td><td><strong>75</strong> per ETH value</td><td>When boosting starts</td><td>Points will be awarded if the liquidity boosting process is not cancelled.</td></tr><tr><td>Shopping</td><td>Directly purchase NFT listed in P-Token</td><td><strong>5</strong> per ETH value</td><td>Transaction completed</td><td>N/A</td></tr><tr><td>Shopping</td><td>Directly purchase NFT listed in ETH/ WETH</td><td><strong>1.5</strong> per ETH value</td><td>Transaction completed</td><td>For shopping mission eligibility, purchase items within the range of 0.8 to 2.5x the floor price.<br>Please note that only selected collections are eligible for this mission - detailed list is provided in <a href="#eligibility">Eligibility</a> section.</td></tr><tr><td>Offer</td><td>Make offer</td><td><strong>1.5</strong> per ETH value</td><td>When owner accepts the offer</td><td>For offer mission eligibility, need to make an offer within the range of 0.8 to 2.5x the floor price.<br>Please note that only selected collections are eligible for this mission - detailed list is provided in <a href="#eligibility">Eligibility</a> section.</td></tr><tr><td>Offer</td><td>Accept offer</td><td><strong>1.5</strong> per ETH value</td><td>When accepting the offer</td><td>For offer mission eligibility, need to accept an offer within the range of 0.8 to 2.5x the floor price.<br>Please note that only selected collections are eligible for this mission - detailed list is provided in <a href="#eligibility">Eligibility</a> section.</td></tr><tr><td>Listing</td><td>List NFT</td><td><strong>1.5</strong> per ETH value</td><td>Time of purchase</td><td>For listing mission eligibility, list items within the range of 0.8 to 2.5x the floor price.<br>Please note that only selected collections are eligible for this mission - detailed list is provided in <a href="#eligibility">Eligibility</a> section.</td></tr><tr><td><strong>Ape Staking</strong></td><td>Stake NFT</td><td><strong>1500</strong> per BAYC<br><strong>750</strong> per MAYC<br><strong>400</strong> per BAKC</td><td>Transaction completed</td><td>If you are using other modules in combination of Ape Staking. Ex. Leverage and then perform Ape Staking, you will still be eligible to earn mission points from both sides.<br>Please note that stake and unstake multiple times on the same NFT will only earn you points once.</td></tr><tr><td><strong>Ape Staking</strong></td><td>Supply $APE</td><td><strong>0.5</strong> per ETH value</td><td>Snapshot every hour</td><td>It is based on the original amount you supply (do not include accrued rewards).</td></tr><tr><td><strong>Ape Staking</strong></td><td>Borrow $APE to Stake</td><td><strong>0.5</strong> per ETH value</td><td>Snapshot every hour</td><td>If you use your own $APE to perform Ape Staking, you will not be earning points from this mission.</td></tr></tbody></table>

<table><thead><tr><th width="305.3333333333333">Modules</th><th width="284">Reference Price</th><th width="265">Example</th></tr></thead><tbody><tr><td>Flash Trade</td><td>Collection Floor Price</td><td>Assuming the current floor price of BACY is 60 ETH, you will receive 300 points if you purchase a BAYC through a flash trade. Conversely, if you sell an NFT for 1,000 P-BAYC, you will receive 600 points.</td></tr><tr><td>Leverage</td><td>Collection Floor Price</td><td>Assuming the floor price of BACY is 60 ETH at the time of repayment, you will receive 300 points.</td></tr><tr><td>Consign</td><td>Collection Floor Price</td><td>You'll receive 300 points if the floor price of BACY is 60 ETH at the time you redeem your BAYC, or if it's 60 ETH when someone purchases your consigned NFT (regardless of whether the listing price is 1,500 or 2,500 P-BAYC).</td></tr><tr><td>Lending Market</td><td>Chainlink Oracle Price</td><td></td></tr><tr><td>Liquidity Boosting</td><td>Token Price from DEX (Uniswap)</td><td>If you commit 10 ETH and 100 P-BAYC to the boosting event, and the exchange rate is 100 P-BAYC to 10 ETH when the boosting starts, you'll receive 500 points (i.e., (10+10) x 25).</td></tr><tr><td>Listing, accepting offer with ETH/WETH</td><td>Sale Price</td><td>Assuming the current floor price of BACY is 60 ETH, selling a BAYC for a price between 48 and 150 ETH will earn you 72 to 225 points. However, selling an NFT outside of this range won't result in any points earned.</td></tr><tr><td>Shopping, making offer with ETH/WETH</td><td>Sale Price</td><td>Assuming the current floor price of BACY is 60 ETH, buying a BAYC for a price between 48 and 150 ETH will earn you 72 to 225 points. However, purchasing an NFT outside of this range won't result in any points earned.</td></tr><tr><td>Shopping with P-Token</td><td>Collection Floor Price</td><td>Assuming the current floor price of BACY is 60 ETH, you'll receive 90 points when you purchase a BAYC denoted in P-Token, regardless of whether the listing price is 1,500 or 2,500 P-BAYC.</td></tr><tr><td><strong>Ape Staking with NFT</strong></td><td>Chainlink Oracle Price</td><td></td></tr><tr><td><strong>Ape Staking with Borrowing $APE</strong></td><td>Chainlink Oracle Price</td><td></td></tr><tr><td><strong>Ape Staking with $APE</strong></td><td>Chainlink Oracle Price</td><td></td></tr></tbody></table>

## Eligibility

Here is the list of collections eligible for the Mega Drop event. Please note that this list may be subject to change over time. However, any adjustments to the eligible collections will not impact the points earned previously.

<table><thead><tr><th width="243">Collections</th><th>Eligible Missions</th></tr></thead><tbody><tr><td>Bored Ape Yacht Club</td><td>All</td></tr><tr><td>Mutant Ape Yacht Club</td><td>All</td></tr><tr><td>Bored Ape Kennel Club</td><td>All</td></tr><tr><td>Azuki</td><td>All</td></tr><tr><td>Wrapped Cryptopunks</td><td>All excluding Lending Market related</td></tr><tr><td>CloneX</td><td>All excluding Lending Market related</td></tr><tr><td>Otherside Koda</td><td>All excluding Lending Market related</td></tr><tr><td>Otherside Expanded</td><td>All excluding Lending Market related</td></tr><tr><td>Otherdeed for Otherside</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>Pudgy Penguin</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>Doodles</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>Moonbirds</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>Meebit</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>BEANZ Official</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>Cool Cats NFT</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>World of Women</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>CryptoPunks V1 (wrapped)</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>DeGods</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr><tr><td>The Captainz</td><td>Directly purchase NFT listed in ETH/ WETH; Make offer; Accept offer; List NFT</td></tr></tbody></table>


# Liquidity Boosting

Liquidity boosting is a liquidity incentive event designed to enhance P-Token liquidity on Uniswap, allowing participants to commit unilateral or bilateral liquidity through Pawnfi's proxy contract and become Uniswap LPs.

To join liquidity boosting, commit ETH, P-Token, or both to the appropriate pool. Each pool has distinct parameters for you to choose from, including:

* **Underlying Tokens**: P-Token (e.g., P-BAYC) and ETH
* **Target Amount**: Total liquidity sought on each side
* **Price Range**: Uniswap V3 price range that the pool will supply liquidity for
* **Raising Duration**: Timeframe for users to contribute to the pool
* **Boosting Period**: Duration the pool will commit liquidity to Uniswap
* **vAPY**: Expected return calculated solely from $PAWN token rewards, excluding swap fees and bonuses

Suppose the target isn't reached before the deadline. In that case, the pool will be canceled, and participants must visit the "Cancelled" page to reclaim their tokens. However, if the target is met, the proxy contract will provide liquidity on Uniswap V3 for market-making. In addition, a price range will be established in Uniswap V3 to optimize capital efficiency, given NFT's nature.

Upon the boosting period's conclusion, participants can claim four types of tokens and rewards:

* **$PAWN token rewards**
* **Committed liquidity's final position**: The final amount may differ from the initial commitment due to AMM pool price change. You can refer to this [article](https://medium.com/coinmonks/uniswap-v3-explained-57e0cdf86719) for detailed explanation on Unsiwap Mechanism.
* **Swap fees**: Uniswap v3 pool-generated trading fees will be evenly distributed among participants.
* **Bonus**: Changes in P-Token prices during the raising period may impact the liquidity needed on Uniswap v3. Pawnfi will optimize capital efficiency and rewards so that any unused liquidity will be supplied in the Pawnfi lending market, with the resulting income distributed as a "Bonus."

<figure><img src="/files/TBj5AWAP8Khv58e15ga9" alt=""><figcaption></figcaption></figure>

Please note:

* Liquidity boosting operates on a **first-come, first-served basis**.
* Once you committed your liquidity in the boosting pool, you will not able to claim back the committed liquidity until
  * The event is cancelled as the raising is not completed before raising duration
  * The event is cancelled due to market volatility or NFT price fluctuation
  * Boosting period ends if the liquidity boosting kicks start.
* The Pawnfi team reserves the right to cancel or delay a boosting pool due to market volatility or NFT price fluctuations, even after the raising is completed. Participants must visit the "**Cancelled**" page to reclaim tokens if a pool is cancelled.
* $PAWN rewards are temporarily unclaimable but can be tracked in your account and claimed later. Pawnfi will announce when $PAWN withdrawals become available.


# Introduction

Auto Compound, Extra Income & No Liquidiation

After the approval of AIP-21 and AIP-22 by ApeCoin DAO, Bored Ape Yacht Club, Mutant Ape Yacht Club, and Bored Ape Kennel Club NFT holders can now earn extra $APE through staking. However, some may want to use their NFTs for other activities like listing or borrowing, which could limit their staking rewards. Additionally, some holders may not have enough NFTs or $APE to maximize their yields.

To tackle these issues, Pawnfi presents the Pool 2 Pool model, optimized for $APE staking. As NFT holders engage in consignment, leverage, and lending on Pawnfi, they can access the $APE pool to borrow and stake $APE without collateral, ensuring uninterrupted staking rewards from Yuga Labs.

Furthermore, $APE suppliers can earn interest by staking in the Pawnfi $APE Pool while NFT holders borrow. The Pawnfi algorithm automatically reinvests idle funds into the official Horizen Labs contract and Pawnfi $APE Pool, allowing $APE suppliers to enjoy compounding rewards from Yuga Labs and Pawnfi. This approach ensures continuous maximization of $APE rewards and utilization.


# Glossary

Key terms and definitions of Pawnfi $APE Staking

## Official $APE Pool

Horizen Labs $APE staking pool.&#x20;

## Official NFT Pool

Horizen Labs NFT staking pool.&#x20;

## Pawnfi $APE Pool

The Pawnfi $APE staking pool enables $APE holders to supply their funds and receive our lending and staking services, including automatic compounding. We either lend out or assist users in staking their $APE into the Official $APE Pool, maximizing their returns on investment.

## Pawnfi NFT Pool

The Pawnfi NFT staking pool allows NFT holders to stake their $APE or borrow from the Pawnfi $APE Pool to perform $APE staking in the Official NFT Pool. Our platform also facilitates automatic compounding of $APE rewards, assisting users in reinvesting them into the Pawnfi $APE Pool to maximize returns on investment.

## Health Factor

The Health Factor is a critical indicator that represents the stability of your Ape Staking. It essentially measures the distance between the current state of your staking and the point where it may need to be terminated. A lower Health Factor indicates that your staking is more secure and less likely to be disrupted due to inadequate returns. The Health Factor is a useful tool to help you manage your staking activity and optimize your returns.

See more details in [Risk Management](broken://pages/nzWortCcNwTE7AUDTp5l).

## sAPE

sAPE refers to "Certificate of Staking $APE," a derivative of $APE available in the Pawnfi $APE Pool. It serves as the primary means of interaction between $APE holders and the Pawnfi Protocol. By minting sAPE, users can earn rewards based on the increasing value of sAPE relative to $APE. This means that over time, the amount of $APE that sAPE is convertible into increases, regardless of the amount of sAPE held. It's important to note that each user has the same sAPE exchange rate for $APE.

sAPE will be visible on [Etherscan](https://etherscan.io/tokens/label/compound), and you should be able to view them in the list of tokens associated with your address.

## Interest Reserve

The interest reserve is vital for ensuring the protocol's sustainability, primarily deriving from borrower interest payments. It serves as incentives for protocol governance and risk premiums to protect suppliers.

## Reinvestment Reserve

The reinvestment reserve refers to the percentage of the reinvested amount that is allocated as the Pawnfi reserve to cover the costs associated with reinvestment, such as gas fees.


# $APE Staking

When $APE holders stake through Pawnfi, their $APE is directly deposited into the official Horizen Labs contract. A key advantage of staking with Pawnfi is the automated compounding of your returns. Periodically, unclaimed rewards are reinvested into the Pawnfi $APE Pool as the new principal.

If an NFT holder wishes to borrow from Pawnfi's $APE Pool for NFT staking, the smart contract will claim back a portion of the deposited $APE and lend it to the NFT holder. Similar to the Cross Margin Lending Market, interest revenue is auto-compounded.

In essence, there are no idle $APE in Pawnfi, as they are either lent out or staked in the official $APE Pool. With both revenue streams auto-compounded, $APE stakers can enjoy the most efficient and legitimate returns.

<figure><img src="/files/kuP57qqFp0xSMywbioSA" alt=""><figcaption></figcaption></figure>

## $APE Staking APY

### Horizen Labs $APE APY

The official $APE staking rate (without compounding) is sourced from the Horizen Labs contract. This rate can be accessed via the data on <https://app.apestake.io/pools>. Furthermore, this rate serves as the base rate in the absence of NFT holders borrowing from the Pawnfi $APE Pool.

#### Reinvestment Reserve

When every time Pawnfi perform reinvestment, a portion of reinvested amount (claimed from unclaimed rewards and supply back to Pawnfi $APE Pool) will be charged by Pawnfi. This reserve is used to cover the costs associated with reinvestment, such as gas fees.

At present, the reinvestment reserve for the $APE Pool is set at 1.5%. However, it may be subject to amendments based on DAO governance decisions or changes in market conditions.

### Borrow Rate

If an NFT holder seeks to borrow from Pawnfi's $APE Pool for NFT staking, the smart contract retrieves a portion of the deposited $APE and lends it to the NFT holder at a specified rate. The following parameters determine this rate:

#### Utilization

$APE liquidity is characterized by its utilization rate $$U$$ :

&#x20;$$U \hspace{1mm} = \hspace{1mm} Total Borrow \hspace{2mm} / \hspace{2mm}Total  Stake$$&#x20;

Like the Cross-Margin Lending Market, the utilization rate (U) indicates the proportion of total staked $APE borrowed at a specific time (t). As U nears 100%, capital scarcity increases until no more assets can be supplied. This situation poses challenges for suppliers seeking to withdraw liquidity when funds are unavailable. Although uncommon, U may surpass 100% if the platform reserve is accessible for borrowing but excluded from Total Supply calculations.

High utilization rates generate higher returns for suppliers, requiring a balance between optimizing utilization and maintaining liquidity. Therefore, the $APE market, like other token markets in the Lending Market, is calibrated around an optimal utilization rate (U optimal) or "Kink" that reflects market conditions and is incorporated into the $APE Pool market to ensure efficiency and stability.

#### Interest Reserve

The interest reserve is vital for ensuring the protocol's sustainability, primarily deriving from borrower interest payments. It serves as incentives for protocol governance and risk premiums to protect suppliers.

Interest reserve stimulate borrowing demand, subsequently increasing the protocol's reserves and market liquidity supply. They contribute to a multivariate system that mitigates market risks and maintains stability. The $APE reserves function as an insurance fund for Pawnfi $APE Staking, safeguarding users in extreme situations.

At present, the interest reserve for the $APE Pool is set at 5%. However, it may be subject to amendments based on DAO governance decisions or changes in market conditions.

#### Interest Rate Model

The $APE Pool interest rate strategy follows the same design as the [Interest Rate Model](/risk/risk-framework/lending-market-liquidity-risk/interest-rate-model#jump-rate-model) under the Cross Margin Lending Market. However, since idle funds are invested in Horizen Labs' $APE contract, borrowers must compensate for the opportunity cost. As a result, the base rate incorporates a spread based on the Horizen Labs $APE Rate.

To mitigate liquidity risk and optimize utilization, borrow rates are determined by the Utilization Rate (U), serving as an indicator of capital availability within the pool. The interest rate model manages liquidity risk by adjusting user incentives to support liquidity:

* When capital is abundant: lower interest rates encourage borrowing.
* When capital is scarce: higher interest rates incentivize loan repayments and additional capital supply.

Borrow Rate = Base + Multiplier x Min(Utilization Rate, Kink) + Jump Multiplier x Max(Utilization Rate - Kink, 0), where

* Base = Horizen Labs $APE APY + 4%
* Multiplier = 10%
* Jump Multiplier = 150%
* Kink = 75%

Again, those parameters are subject to amendments based on DAO governance decisions or changes in market conditions.

### Final Staking APY

* BR = Borrow Rate
* PU = Pawnfi $APE Pool Utilization
* IR = Interest Reserve
* HL\_APY = Horizen Labs $APE APY
* RR = Reinvestment Reserve = % of reinvested amount charged as Pawnfi reserve

{% hint style="info" %}
$APE Staking APY = BR \* PU \* (1 - IR) + (1 - PU) \* HL\_APY \* (1 - RR)
{% endhint %}


# NFT Staking

When NFT holders stake through Pawnfi, their $APE is directly deposited into the official Horizen Labs contract. A key advantage of staking with Pawnfi is the automated compounding of your returns. Periodically, Pawnfi Bot will claim rewards and reinvest into Pawnfi $APE Pool for you, significantly increasing your yield rate.

<figure><img src="/files/jlnvOfgCb6N3hcLbYSlw" alt=""><figcaption></figcaption></figure>

## Staking APY

{% hint style="info" %}

* ONP\_APY = Official NFT Pool APY
* H = Total hours in a year (365x24)
* SR = Pawnfi $APE Pool Supply Rate

Stkaing APY = (ONP\_APY / H) × ((1 + SR / H)^(H) - 1) / (SR / H)
{% endhint %}

## Existing Users

Upon supplying, leveraging, or consigning NFTs in Pawnfi, users maintain ownership of their assets even as they reside within a Smart Contract. This enables them to continue participating in Ape Staking through the platform at <https://apestake.io/> if they have already initiated staking independently. Additionally, users can begin new staking with their $APE or collaborate with our shared $APE pool to engage in $APE Staking.

### Scenario 1: Currently Staking with Horizen Labs Contract

One of the advantages of supplying, leveraging, or consigning NFTs through Pawnfi is the uninterrupted continuation of your Ape staking. Moreover, we assist in automating the reinvestment process to maximize your returns.&#x20;

For instance, if you have already deposited 10,000 $APE in the BAYC pool before placing your BAYC in Pawnfi, your unclaimed rewards would typically accrue without generating additional rewards (although you can manually claim and deposit them in the official $APE pool). In contrast, Pawnfi's smart contract automatically claims these unclaimed rewards on your behalf and deposits them in Pawnfi $APE pool. Furthermore, the unclaimed rewards in the official $APE pool are reinvested as staking principal, further enhancing your potential gains.

### Scenario 2: Not Staking, but Possess Sufficient $APE

If you have not yet initiated NFT staking and wish to do so using your own $APE, Pawnfi serves as the ideal gateway. By supplying, leveraging, or consigning NFTs in Pawnfi, users retain ownership of their assets, even when they are held within a Smart Contract. To begin generating staking rewards, simply set your deposit amount in the NFT pool through the Pawnfi interface.

Similar to Scenario 1, Pawnfi's smart contract will automatically claim unclaimed rewards on your behalf and supply in Pawnfi $APE pool. Additionally, these unclaimed rewards in official $APE will be reinvested as staking principal, thereby increasing your potential earnings.

### Scenario 3: Not Staking and Seeking to Borrow $APE

If you haven't started NFT staking yet and lack sufficient $APE, Pawnfi is the perfect solution. You can conveniently borrow from the Pawnfi $APE Pool to begin your staking journey. Similar to Scenario 1, Pawnfi's smart contract will automatically claim any unclaimed rewards for you and repay the loan, reducing the chances of your account being terminated from staking and helping you achieve a higher return rate. Once the loans are repaid, any available $APE will be automatically staked back into the Pawnfi $APE Pool upon claiming rewards and withdrawing, generating further reinvestment rewards.

## Visitors

Even if you're not currently using Pawnfi, you can still engage in $APE staking through our platform to enjoy the highest possible yield. In a manner similar to the three scenarios mentioned above, initiating a new staking will result in your NFT being supplied to the Pawnfi Lending Market. This allows you to earn additional P-Tokens (P-BAYC, P-MAYC, or P-BAKC, based on the NFTs used for $APE staking). By choosing this approach, you ensure the highest level of capital efficiency and maximum returns.


# Risk Management

Pawnfi allows NFT holders to borrow from the Pawnfi $APE Pool when they don't have enough $APE, creating a possibility, albeit extremely unlikely, that staking rewards might not fully cover the $APE loan interest. Our primary objective at Pawnfi is to deliver a risk-free Ape Staking experience and protect users from potential losses during staking. In line with our commitment to user safety, we've outlined two scenarios where a user's NFT staking may be temporarily suspended:

1. Prior to the commencement of NFT Staking
2. During the NFT Staking process

## Prior to the commencement of NFT Staking

When initiating NFT staking on one of your NFTs, you will not be able to borrow any $APE from the Pawnfi $APE Pool for staking if the following condition is not met:

{% hint style="info" %}
NFT Stake APY (based on data from Apestake.io) > Borrow Rate (based on data from Pawnfi $APE Pool) + 5%
{% endhint %}

Nevertheless, you can still proceed with NFT staking if you fully stake using your own $APE, without borrowing from the Pawnfi $APE Pool.

## During the NFT Staking process

To ensure that staking rewards adequately cover the $APE loan interest, Pawnfi will continuously track each user's borrowing status, NFT Stake APY, and Borrow Rate in real-time. By doing so, Pawnfi will compute a Health Factor to determine if it is necessary to initiate the repayment process for the $APE loan and suspend a user's NFT staking.

### Health Factor

The Health Factor serves as a crucial metric within the system, where higher values signal an increased likelihood of suspending a user's NFT staking. When the Health Factor reaches 100, either Pawnfi Bot or any authorized volunteers can begin the $APE loan repayment process while simultaneously suspending NFT staking. In essence, deposits and unclaimed rewards from specific NFT IDs will be withdrawn to repay the $APE loan. This process will persist until the Health Factor decreases to a value below 50. The formula used to compute the Health Factor is as follows:

{% hint style="info" %}
BAYC Pool APY, MAYC Pool APY, and BAKC Pool APY are derived from the respective NFT Stake APY data available on Apestake.io. The Health Factor calculation formula incorporates these APY values and is as follows:

* Threshold = 1.025
* R = \[(Σ BAYC Deposit) x BAYC Pool APY + (Σ MAYC Deposit) x MAYC Pool APY + (Σ BAKC Deposit) x BAKC Pool APY]/ (Total Borrow x Borrow Rate x Threshold)
* K = e^(2\*(1-R))
* **Health Factor** = 100-100\*(1 - K)&#x20;
  {% endhint %}

Please be aware that the $APE loan repayment process does not specifically identify the NFT IDs from which the user borrowed funds (as it is possible to borrow varying amounts when initiating staking for different IDs). This means that even if a user did not borrow any funds while initiating $APE staking for their BAYC #9672, it is still possible that the deposit and unclaimed rewards for BAYC #9672 will be withdrawn to repay an $APE loan, resulting in the suspension of BAYC #9672 staking.

### Example

Suppose Alice is currently staking $APE via Pawnfi, and her staking profile looks like this:

* Staking 500 $APE with BAYC #9672 in BAYC Pool
  * BAYC Pool APY: 100%
  * BAYC Pool unclaimed rewards: 20
* Staking 1100 $APE with MAYC #12336 in MAYC Pool
  * MAYC Pool APY: 58%
  * MAYC Pool unclaimed rewards: 30
* Staking 0 $APE in BAKC Pool
  * BAKC Pool APY: 130%
* Total Borrow: 1500 $APE
* Borrow Rate: 53.64%

Alice's Health Factor calculation is as follows:

* Threshold: 1.025
* R: (500x100% + 1100x58% + 0x130%) / (1500x53.64%x1.025) = 1.38
* K: e^(2\*(1-1.38)) = 0.468
* Health Factor: 100 - 100\*(1 - 0.468) = 46.8

However, if the borrow rate suddenly increases to 75%, Alice's Health Factor will rise to 103. This will trigger the $APE loan repayment process and result in the suspension of staking for some NFT IDs. In Alice's case, her deposit and unclaimed rewards in MAYC #12336 will be entirely withdrawn to repay her loan. Her updated staking profile will be:

* Staking 500 $APE with BAYC #9672 in BAYC Pool
  * BAYC Pool APY: 100%
  * BAYC Pool unclaimed rewards: 20
* Staking 0 $APE in MAYC Pool
  * MAYC Pool APY: 58%
* Staking 0 $APE in BAKC Pool
  * BAKC Pool APY: 130%
* Total Borrow: 370 $APE
* Borrow Rate: 53.64%

With these changes, her Health Factor drops to 22, and no further repayments will occur. However, Alice's MAYC #12336 is no longer staking (suspended), and she will need to initiate a new staking process with $APE.


# FAQ

### Security

#### Q: If my NFT is sold or liquidated while committed to an NFT pool, will I lose all my staked $APE?

A: No, you will not lose your staked $APE. The Pawnfi ApeStaking contract safeguards your assets during NFT ownership changes. If your NFT is purchased, the staked $APE (including reinvested amounts) and unclaimed rewards will first repay any outstanding $APE loan from initiating Ape Staking. The remaining balance is then transferred to your wallet. In the case of liquidation, unclaimed rewards are allocated to the community reserve, supporting the ecosystem's health.

#### **Q:** If my NFT is sold or liquidated while committed to NFT pool, will I lose all my staked $APE?

A: No, you won't lose your staked $APE. Please refer to the previous question for more details on how the ApeStaking contract safeguards your assets during NFT ownership changes.

### Service Fee

#### Q: Are there any fees associated with using Pawnfi's Ape Staking service?

A: Each time a reinvestment is triggered (reinvesting unclaimed rewards into the Pawnfi $APE Pool), a 2% Reinvestment Reserve fee is applied to cover the gas costs associated with the auto-compounding process.

### Gas Cost

#### Q: Who covers the gas fees for the reinvestment process?

A: Users are responsible for covering gas fees when staking and withdrawing from Pawnfi Ape Staking. However, the regular auto-compounding gas fees are taken care of by the Pawnfi Treasury, ensuring a seamless experience for users without the need to worry about these additional costs.


# Understanding Governance

The Pawnfi community governs itself via the Pawnfi DAO, the decentralized governance framework that supports the growth and expansion of Pawnfi Protocol. With the collaboration between Pawnfi core team and Pawnfi community, it ensures the protocol can rapidly adjust to changing market conditions, as well as upgrade core parts of the protocol as time goes on.

This governance guide is an overview of the governance structure and process. It’s a living document that will evolve and improve with the DAO community’s input.

<figure><img src="/files/Uh0nhjpxrvm3o2xK4w8P" alt=""><figcaption><p>Governance Workflow</p></figcaption></figure>

### Governance Power

PAWN token holders receive governance powers (Voting Power) by placing their PAWN in Pawnfi SAFE.

### Governance Channel

**Governance Forum** is where debate starts. Any one can initiate a discussion under corresponding category.

**Snapshot** is used for voting. Specific topics that core team believes worthy of formal discussion will be finalized as PIPs and become available for voting on Snapshot. It is required to have Voting Power to participate voting on Snapshot.

### **Discussion Categories**

More details will be provided in governance forum. But in short, you can discuss anything with the community.

* **Governance:** Discussion around the Governance process, topic categories, standards and expectations, including the use of community forum.
* **Assets & Markets:** Discussion around assets & markets for Pawnfi Protocol.
* **Risk:** Discussion around the risk related to the protocol, underlying assets or the appropriate sub-categories.
* **Protocol Development**: Discussion around the future development, upgrades, and enhancements on Pawnfi Protocol.
* **On The Fly:** Discussion around the topics that does not fit in an existing category.
* **Help & Resources:** Topics to help our DAO families to stay answered, informed and connected.

Anyone can initiate discussion on a particular concern or suggestion in the community, and participate in other topics in the meantime.

### PIP Voting

Pawnfi DAO’s consensus mechanism aims to make voting fair, transparent, and low-cost, so that PAWN token holders with Voting Power can participate in the decision-making of the DAO.

#### Voting Process

1. Moderators post PIPs to Snapshot after receiving consensus from the community. New PIPs will always be the critical ones that Pawnfi core team believe worth the most formal discussion amongst DAO family.
2. DAO members will need to vote on Snapshot with their Voting Power. One voting power is equal to one vote. The voting options for a Live PIP are “PASS” and “BLOCK.” Voting “PASS” means the voter is in favor of implementing the PIP exactly as-is. Voting “BLOCK” means the vote is against implementing the AIP exactly as-is — you may vote “BLOCK” to encourage redesign of the PIP.
3. The voting for each proposal will be open for voting for six days.
4. Proposals that pass the voting threshold and receive a majority “PASS” vote are moved into implementation. Proposals that are blocked will have the chance to be resubmitted if the community believes it worth another round of voting/ formal debate. If by the Vote Close Time the Live PIP has not gotten any votes or is tied, it will be rolled back for community discussion and be reposted to PIP voting later.


# PIP

Pawnfi Improvement Proposal

Pawnfi Improvement Proposal (PIP) may start with a topic which has reached enough consensus via community discussion in Governance Forum, or a PIP can be directly created by Pawnfi core team, then go through a snapshot voting process to decide whether it will be further implemented within the protocol.

Normally, the topic will be proceeded by Pawnfi core team for a PIP under two conditions:

* The topic will have great impact on the long-term development of Pawnfi Protocol
* The topic has raised a great deal of attention or controversy the whole community

The governance process may be adjusted depending on the actual progress and needs of Pawnfi governance. E.g. the community may be given access to submit a PIP in the future.


# Glossary

## P-Token

P-Token is an ERC-20 token anchored to each NFT collection, at the ratio of 1:1000.

## iToken

Certificate of supplying assets in lending market. You can stake iToken in gauge pool for liquidity mining.

## $PAWN Token

Governance token of Pawnfi, can be obtained internally through borrowing from lending market (passive incentives), staking iToken for liquidity mining (active incentives) and participating in liquidity events (ex. Liquidity Boosting). Of course, eventually it can also be obtained from exchanges.

## Voting Power&#x20;

The power to vote in Pawnfi DAO governance, can be obtained through placing $PAWN in Pawnfi SAFE.

## Utilization Rate&#x20;

The ratio of the on-loan quantity divided by the total inventory value of the pool.

## Decay rate&#x20;

The rate at which voting power decays. Decay happens on every Thursday at 00:00:00 UTC.

## Gauge Pool&#x20;

Gauge pool is where you can utilize your voting power to share Pawnfi rewards at a projected gauge weight in Pawnfi.

## Gauge Weight&#x20;

Gauge weight represents how many votes each pool get from weekly voting. Simply put, a gauge weight translates into how much of the $PAWN reward each pool receives.

## Streamable&#x20;

Streamable are $PAWN that are no longer placed in SAFE, but still in the contract. You can initiate an exit stream and then they stream out over the next 7 days.

## PIP&#x20;

Pawnfi Improvement Proposal (PIP) is submitted to Pawnfi Governance forum to decide whether the protocol will make possible changes. It can be a topic that reaches enough consensus from community discussion or directly initiated by core team.

## Snapshot&#x20;

Snapshot is where our community can vote for an PIP. The result (passed or declined) will have a direct impact on whether the proposal can be further implemented in Pawnfi protocol.

## TVL&#x20;

TVL (Total Value Locked) stands for the overall value of crypto assets circulating in the whole Pawnfi Protocol.

## LTV&#x20;

LTV (Loan-To-Value) is the ratio of the loan amount you can potentially receive to the value of the asset collateralized.

## APY&#x20;

Annual Percentage Yield (APY) is the rate of return you can earn form each of Pawnfi financial modules.

## DeFi

Decentralized Finance, commonly known as DeFi, refers to the blockchain-powered technology that removes centralized intemediaries, such as banks or exchanges, from financial transactions.

## Collateral

Collateral is a digital asset(s) of value pledged to secure a loan in Pawnfi. Collateral reduces the risk for lenders in extreme conditions. E.g. if a borrower defaults on the loan, the lender can seize the collateral to recoup the losses.

## Collateral Factor (%)

Collateral Factor is the maximum amount a user can borrow, represented in percentages, based on the total amount of assets supplied.

## Reserve Factor&#x20;

The reserve factor is the protocol's deposit to safeguard the overall sustainability. It derives from protocol's interests and can be used as incentives for governance and risk premium to protect all suppliers.

## Pawnfi SAFE&#x20;

&#x20;Secure Asset For Ecosystem (SAFE) is where users can place their $PAWN to gain entitlement to voting power. While voting power is the foundation of Protocol governance, placing $PAWN in SAFE will not only improve protocol-level safety but also make Pawnfi more decentralized and community-driven.

## Boost&#x20;

Pawnfi offers Max Boost for you to place your $PAWN in SAFE to earn extra $PAWN on your provided liquidity.

## Borrow Limit&#x20;

Borrow Limit = Supplied Value \* Collateral Factor

## Borrow Limit Used (%)&#x20;

Borrow Limit Used = Borrowed Value/ Borrow Limit


# Audits

At Pawnfi, we prioritize the security and reliability of our protocol. To ensure this, our development team works closely with third-party auditors and consultants in addition to our in-house design efforts. Our commitment to transparency is reflected in our practice of making all contract codes and balances publicly verifiable and subjecting them to rigorous review and audits by reputable firms such as PeckShield.&#x20;

As we evolve and enhance our platform, introducing new features, we acknowledge that potential vulnerabilities could emerge. Hence, we pledge to engage additional reputable audit firms to conduct fresh audits for every significant update, ensuring any changes to our codebase are diligently scrutinized and vetted, thereby maintaining the security standards our platform is built on.

<table><thead><tr><th width="145.33333333333331">Auditor</th><th width="137">Scope</th><th>Date</th><th>Status</th><th data-type="files">Link</th></tr></thead><tbody><tr><td>PeckShield</td><td>Protocol</td><td>2023 Q1</td><td>Completed</td><td><a href="/files/0um3dn7szQZOdtbzl48o">/files/0um3dn7szQZOdtbzl48o</a></td></tr><tr><td>PeckShield</td><td>Ape Staking</td><td>2023 Q2</td><td>Completed</td><td><a href="/files/RSBpHtcta9mORea7NJf1">/files/RSBpHtcta9mORea7NJf1</a></td></tr></tbody></table>