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Exit Early

A lender can exit their position early by reselling it before maturity. Early exit works by reselling a lend position:

  • Resell at the current market rate by matching against an existing buy (lend) offer, transferring the lending position to another lender. This requires sufficient market liquidity and executes immediately at the prevailing rate.
  • Relist at a preferred rate by creating a sell (borrow) limit order. The position remains open until another user fills the order at that rate, or until the lender cancels it.
Resell option for lenders

A lender can always relist their lend position at a lower rate than the entry rate to capture part or all of the accrued interest early. Relisting at par (0%) captures the full interest accrued so far.

Example​

A user lent 1,000 USDC at 5% APR for 1 month and will receive 1,004.17 USDC at maturity.

The user can borrow USDC to close their lend position. If there is an outstanding buy (lend) offer at 5% APR for 1 month, the user can borrow 1,000 USDC at 5% APR for 1 month against that offer to exit early. Note that if the rate at which the user borrows to close their position differs from the rate at which they initially entered, they will have a gain or a loss due to the difference in interest rates.

Impact of rates on the value of a position​

Reselling a lend position before maturity exposes the user to mark-to-market gains or losses. If market rates have moved since the position was opened, the cost to unwind it will differ from the original principal:

  • If rates have risen and the user entered at a lower rate than the rate at which they exit, they will realize a loss.
  • If rates have fallen and the user entered at a higher rate than the rate at which they exit, they will realize a gain.

Example: rates increase from 5% to 7%​

A user lent 1,000 USDC at 5% APR for 1 month, earning 1,004.17 USDC at maturity.

To exit early at the current market rate of 7%, the user needs to borrow against their lend position to create an offsetting obligation of 1,004.17 USDC at maturity. At 7% APR, the amount they receive today from borrowing is:

1,004.171+7%12=998.34 USDC\frac{1{,}004.17}{1 + \frac{7\%}{12}} = 998.34 \text{ USDC}

The user initially lent 1,000 USDC but only receives 998.34 USDC when exiting, resulting in a loss of 1.66 USDC (1,000 - 998.34). This loss is due to exiting at a higher rate (7%) than the rate at which they entered (5%).

Example: rates decrease from 5% to 3%​

A user lent 1,000 USDC at 5% APR for 1 month, earning 1,004.17 USDC at maturity.

To exit early at the current market rate of 3%, the user needs to borrow against their lend position to create an offsetting obligation of 1,004.17 USDC at maturity. At 3% APR, the amount they receive today from borrowing is:

1,004.171+3%12=1,001.67 USDC\frac{1{,}004.17}{1 + \frac{3\%}{12}} = 1{,}001.67 \text{ USDC}

The user initially lent 1,000 USDC and receives 1,001.67 USDC when exiting, resulting in a gain of 1.67 USDC (1,001.67 - 1,000). This gain is due to exiting at a lower rate (3%) than the rate at which they entered (5%).