Capital pools fund credit by acquiring loans from originators at a discounted face value of the exchanged future sales. This discount, calculated by the protocol, represents upfront interest payments to capital sources and associated fees. The acquisition is funded by a decentralized network of accredited capital sources, reducing reliance on institutional providers that often impose complex terms and require extensive due diligence. Unlike generalized lending protocols, the Sivo DeFi protocol ties capital pools to specific originators, enabling tailored management of exposure based on factors such as loan type, borrower profile, geographic location, and risk tolerance. Additionally, capital pools offer flexibility in choosing between senior and junior tranches, with junior tranches being subordinate to senior ones. Similar to banks, capital pools operate with a reserve set by the protocol to assist with liquidity management.
Once the originator agrees to the exchange ratio, the AI configures smart contracts to oversee all aspects of the lending process, including receivable purchase approvals and disbursements. The AI also deploys capital pools with tranches and a subordination hierarchy aligned with the originator's portfolio risk profile, dynamically adjusting rates and liquidity based on portfolio performance, thereby automating what is traditionally a complex process. While the immediate purchase of receivables by capital pools ensures that credit can be extended without delays, originators must provide the necessary data to the network to approve purchases and trigger disbursements, in line with industry practices.
To ensure capital sources receive market-leading returns and liquidity, the protocol employs a dynamic interest rate model similar to Compound's, featuring a "kink" point where rates increase sharply after a certain threshold to preserve liquidity. However, the protocol operates within a defined range, including a robust 20% APR floor, adjustable through governance. This structure ensures attractive returns for capital sources without overburdening borrowers while maintaining portfolio solvency and regulatory compliance.
Capital sources can deposit assets into pools by connecting a compatible wallet or generating one through the AI or interface. Fiat deposits are digitized and securely held by a regulated partner until they are transferred outside the network. In return, capital sources receive sTokens representing their share in the liquidity pool, automatically accruing interest based on borrowing activity within the protocol. These sTokens can be redeemed at any time for the underlying asset plus accrued interest. Unlike protocols like Compound, where interest accrues only upon interaction with the protocol, Sivo DeFi compounds interest continuously. Additionally, capital sources in Sivo DeFi earn an arrangement fee for every loan funded, which is automatically added to their balance and accrues interest along with the principal deposited.
Capital sources holding sTokens (discussed next in this paper) earn SVO, the network's governance token, through their participation in capital pools. Both capital sources and originators are rewarded with SVO tokens based on the interest generated or paid within the pools. The distribution of SVO occurs proportionally across all capital pools, with a split between capital sources and originators, similar to Compound. Capital sources and originators must actively claim their SVO tokens through the AI, user interface, or smart contract interaction. Once claimed, SVO tokens can be held, exchanged for benefits, or utilized in governance decisions that shape the future direction of the Sivo DeFi protocol.
Capital sources seeking to deposit funds into a fully utilized capital pool, where all resources have been allocated to purchasing loans from originators, will enter a queue. Priority in this queue is given to capital sources based on the amount of SVO, the network's governance token, they hold. Similar to Compound, when capital sources withdraw funds from the pool, low liquidity may result in withdrawals being delayed or paid out incrementally to ensure the pool's stability.
Capital sources must execute a declaration confirming that they meet the criteria for being an accredited investor in their jurisdiction. This criteria, managed by AI, will be made available to them. They will be informed that if third-party verification proves otherwise, they may be removed from any capital pools they’re participating in, and their principal will be returned. Capital management and monitoring are facilitated through AI interactions, interfaces, or supported DeFi dashboards, ensuring transparency and ease of management for all participants.