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How Flower Works

Flower is a decentralised, over-collateralised synthetic asset protocol. Flower allows users to mint flUSD by creating a Collateralized Debt Position (CDP), where users deposit crypto assets as collateral and borrow flUSD against them.

Collateralized Debt Positions (CDPs)​

A Collateralized Debt Position (CDP) is the foundation of Flower's flUSD minting process. It enables users to lock up crypto assets as collateral and borrow flUSD, a USD-denominated synthetic dollar, against that collateral. The protocol requires over-collateralization to help maintain system solvency during volatile market conditions.

How CDPs Work:​

  1. Deposit Collateral:

    • Users deposit supported crypto assets, such as WETH or SUSDS, into the Flower protocol.
    • The collateral is locked in a smart contract.

  2. Determine Borrowing Capacity:

    • The amount of flUSD you can mint depends on the collateral's value and the Loan-to-Value (LTV) ratio.
    • Example:
      • Deposit 1 ETH worth $2,000.
      • If the maximum LTV ratio is 75%, you can borrow up to $1,500 flUSD.

  3. Borrow flUSD:

    • Mint flUSD by borrowing against your deposited collateral.
    • The protocol enforces strict borrowing limits, ensuring flUSD remains overcollateralized.

  4. Maintain Position Health:

    • Your CDP's health is measured by the Health Ratio:
      • Health Ratio = Risk Adjusted Collateral Value / Borrowed Value
    • To avoid liquidation, ensure your Health Ratio stays above 1
    • A Health Ratio below 1 indicates your position is at risk of liquidation

Example:​

Imagine you deposit 2 WETH (valued at $4,000) into Flower:

  • Maximum Borrowing Capacity: 4,000 × 75% = 3,000 flUSD
  • Minimum Collateralization Ratio: 133%
  • To mint 3,000 flUSD:
    • Collateralization Ratio = (4,000 / 3,000) × 100 = 133%

If the ETH price drops to $1,800:

  • New Collateral Value: $1,800 × 2 = $3,600
  • Collateralization Ratio: $3,600 / $3,000 × 100 = 120% (below the MCR), below 1 health ratio
  • Action Needed: Add more collateral or repay flUSD to avoid liquidation.

Liquidation Process:​

If your CDP’s collateralization ratio falls below the minimum required:

  1. Liquidators can (partially) liquidate your position to cover the debt.
  2. A dynamic liquidation penalty is applied based on the health of your position.

Benefits of CDPs in Flower:​

  • Capital Efficiency: Unlock liquidity from your crypto assets without selling them.
  • Flexible Borrowing: Borrow and repay flUSD anytime, with no fixed term.
  • Directional Trading: Use borrowed flUSD to gain leveraged exposure to your collateral asset.
  • Yield Amplification: Multiply your yield through CDP looping strategies.

Key Considerations:​

  • Volatility Risk: A sudden drop in collateral value can lead to liquidation.
  • Over-Collateralization: Required to safeguard the protocol and ensure flUSD stability.
  • Interest Rate Volatility: Interest rates can fluctuate, affecting your borrowing costs and profitability.
  • Leverage Risk: Directional trading and yield amplification strategies can increase potential losses.
  • Smart Contract Risk: The protocol is built on smart contracts and collateral assets may be subject to smart contract risks.

By using CDPs, Flower empowers users to access liquidity while keeping their assets productive. Explore Peg Stability Mechanisms to see how the system maintains flUSD's value.