The core of the Parallel Protocol are Vaults. Users mint PAR/paUSD by depositing collateral such as Ether (ETH) into the Vault smart contract. The steps involved to mint new PAR/paUSD are as follows:
A Borrower deposits collateral, automatically creating a new Vault. Based on the Vault's collateral balance, a Borrower can borrow up to a certain amount of PAR/paUSD. The Vault must be collateralized with more than a Minimum Collateralization Ratio (MCR) for borrowing. For example, an MCR of 150% means borrowers need 150% collateral deposited before they can borrow.
A separate liquidation MCR (Liquidation Ratio (LR)) is used to calculate for liquidations. For example, an LR of 130% means Vaults with an MCR below 130% can be liquidated. Both ratios for initial borrowing and liquidations are configured per collateral type.
The PAR smart contract mints the borrowed amount of PAR tokens to the Borrower.
An Origination Fee is applied for newly created debt. (0.2% of minted amount)
PAR & paUSD are ERC20 tokens that one can transfer and use normally, pegged to the EUR & USD fiat currency.
A Borrowing Fee accrues over time on all active Vaults, which has to be fully repaid before the Borrower can withdraw their collateral.
A Health Factor is the ratio between a vault's current and minimum MCR (or LR.) If a Vault's liquidation health factor goes below a minimum value due to market changes, profit-seeking Liquidators can liquidate the undercollateralized Vault to receive its collateral at a discount.
Borrowers need to retain enough collateral in their Vaults to borrow additional funds and avoid being liquidated.
The PAR & paUSD token are fully redeemable stablecoins. Borrowers can redeem and burn PAR/paUSD to repay their debt, close their Vault, and withdraw their collateral.
Liquidators earn a liquidation bonus for liquidating underwater vaults.
A Liquidation Fee is charged to the Borrower during liquidation, which is added to the outstanding debt.