Borrower Payoff

Description of borrower's perspective and ZLL payoff in MYSO v1

From a borrower's perspective, a Zero-Liquidation Loan can be seen as a swap between the borrower and a pool, in which the borrowers pledges some collateral token, receives some amount of loan tokens, and is allowed to reclaim their previously pledged collateral (net of fees) if they pay a pre-determined repayment amount prior to the expiry of the loan.

This can be seen as a call option that gives the borrower the right to "buy back" collateral tokens from the pool for a set repayment amount.

When a borrower holds underlying collateral themselves, they participate in a 1:1 value change of the asset over time. After a loan is taken out, the borrowers holds a call option on their collateral as well as the loan amount. This means that the borrowers retains upside participation in the collateral while being protected from any downside risk, i.e., if the collateral price falls below the some strike price K then the borrower doesn’t have any incentive to repay and will leave the collateral in the pool.