Skip to main content1. What actually determines the interest rate a borrower pays?
Every borrower’s rate is built from three main pieces:
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The borrower’s Nexio credit score (0–5)
- 0 = very weak; 5 = very strong.
- The score summarizes many factors: business & financial strength, governance, compliance / AML, custody quality, and venue/jurisdiction quality.
- A higher score → lower estimated probability of default → lower premium over the risk-free rate.
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The BTC “risk-free” benchmark rate
Nexio estimates a BTC-denominated baseline rate by blending several low-risk yield sources:
- Ethereum staking yields (via liquid-staking tokens)
- Perpetual futures funding-rate capture (cash-and-carry trades)
- Tokenized T-bill / money-market yields (on-chain Treasuries)
These are treated as multiple “sensors” of the underlying BTC time-value of money and combined into a smooth daily series.
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The borrower’s BTC collateral structure
- How much collateral a borrower posts determines a loss given default: “If the borrower defaults, what % of principal would lenders likely lose after BTC collateral and recoveries?”
- More BTC collateral → lower credit spread.
- Less or no BTC collateral → higher credit spread.
At a high level:
Quoted rate ≈ BTC risk-free rate + probability of default × loss given default.
The full pricing formula also includes other terms for risk parameters.
2. What does the 0–5 credit score actually mean in terms of default probability?
Nexio maps each credit score to a 1-year probability of default.
A simplified example of that mapping (illustrative, not a legal quote):
| Credit score | Approx. 1-yr PD |
|---|
| 0.0 | 44.26% |
| 0.5 | 31.75% |
| 1.0 | 21.42% |
| 1.5 | 13.77% |
| 2.0 | 8.56% |
| 2.5 | 5.20% |
| 3.0 | 3.11% |
| 3.5 | 1.85% |
| 4.0 | 1.09% |
| 4.5 | 0.64% |
| 5.0 | 0.38% |
- Moving from 2 → 3 cuts the estimated default risk by roughly 40% (8.6% → 3.1%).
- Moving from 3 → 4.5 roughly halves it again (3.1% → 0.6% range).
That drop in probability of default directly lowers a borrower’s premiums.
Below is a graph of Nexio’s approximate probability of default rates given different credit scores.
3. How does BTC collateral affect the rate a borrower is quoted?
For a borrower, the key idea is:
More BTC collateral → Smaller expected loss for lenders → Lower rate.
Conceptually:
- If a borrower posts little or no BTC, lenders rely mostly on the borrower’s credit quality and legal recovery. If the loss given default is high (e.g., ~60%), then the premium over the risk-free rate is large.
- If a borrower posts meaningful BTC margin, then even if the borrower defaults, a chunk of the loan can be repaid from that collateral. As the loss given default shrinks, the rate falls.
Below is a plot of the borrower’s quoted rate given their collateral for various credit scores. It assumes a risk-free rate of 3%.
4. What happens to a lender’s BTC when deposited?
When a lender deposits BTC:
- It is wrapped as uBTC (an ERC-20 on Ethereum). The lender can send uBTC into any borrower’s vault they choose.
- Inside a borrower vault, the lender’s uBTC sits in one of three liquidity states:
- Locked – actively lent to the borrower, earning interest.
- Staged – committed to this vault but not currently in use (e.g., interest paid by the borrower). It is “on deck” to be locked. A lender can always withdraw staged liquidity.
- Queued – not yet committed to this borrower at all, just waiting. A lender can always withdraw from the queue. Staged liquidity is locked before queued liquidity.
5. Once BTC is lent out and paid back, will it be lent out again next time?
Yes, the lender’s locked liquidity continues to be lent out repeatedly, at updated interest rates for that borrower for each new loan.
6. Does BTC collect compound interest?
Yes, staged liquidity will be brought into the vault, creating compound interest, provided that the borrower increases the amount they are lent each time they take out a loan.
7. How does the queue work?
Vaults can be capacity-constrained:
- Each borrower sets a vault cap (the amount of BTC they are willing to borrow in that epoch).
- Once a vault is at cap, any new deposits go into the queue:
- A lender owns queued uBTC, but it is not yet exposed to this borrower.
- Queued uBTC can be withdrawn at any time.
- As capacity opens up (the borrower raises cap or other lenders withdraw), the protocol pulls liquidity from the queue and locks it on a first-come, first-served basis.
