When a loan is initiated on the Pine Protocol, the terms and conditions for the loan are defined in a smart contract and the NFT collateral is deposited into the same smart contract. The smart contract is between the borrower and the lender and depending on different conditions, either party would have the rights to take ownership of the NFT collateral asset. As the protocol is designed to be decentralized and non-custodial, no one besides the borrower and lender would have access to withdraw the NFT from the smart contract.
In V1 and V2 of the Pine protocol, the addresses of the lender and the borrower are written into the loan smart contract directly. This cannot be changed for as long as the loan position remains open. To make it even more decentralized and flexible, the lending and borrowing positions are tokenized as NFTs in the Pine V3 smart contract design. Any blockchain address that holds on to these NFTs would then be the lenders and borrowers for the respective loan positions.
Lenders with any active loan in their pool will receive an NFT which is a tokenized promissory note representing a claim to the principal amount and interest outstanding of a specific loan. It also gives the bearer the right to liquidate. The token is tradable in the secondary market.
Borrowers will receive an NFT which is a LP token representing the right to reclaim the NFT collateral ownership upon full repayment of the loan. The token can be staked on any smart contract to enjoy custodian services and third party composability.
Here are some examples:
- Auto loan rollover through a smart contract decentralized custodian
- Stake in other protocols to earn yield or provide liquidity
- The token is tradable in the secondary market