Reserve Loans

Reserve Loans are a core financial primitive introduced by Polaris, enabling users to borrow ETH directly from the bonding curve reserve using fpETH as collateral.

As described in the fpETH section, fpETH represents the steadily growing floor component of pETH.

Since the fpETH price in ETH is guaranteed to only increase, changes in the ETH price cannot cause the position to become undercollateralized. This removes the need for liquidations and makes it possible for users to borrow up to 100% of the floor value represented by their fpETH.

With this feature, borrowers gain ETH liquidity without giving up fpETH yield, making highly capital-efficient looping strategies possible.

Loan Mechanics

Instead of a conventional borrowing interest rate, Reserve Loans charge a time-weighted, utilization-based fee on the growth of the fpETH floor, plus a 0.05% opening fee on the ETH borrowed.

The fee on floor growth is utilization-based. As more ETH is borrowed from the bonding curve reserve, utilization rises and a larger portion of the floor appreciation is allocated to the fee. When utilization is lower, the portion allocated to the fee is lower as well. The fee is also time-weighted, which means it accrues gradually while the loan stays open and only on the floor growth produced during that time. Since it is taken from that growth, the fee never eats into the position.

Fees are collected from every existing borrower any time someone touches a Reserve Loan, whether a loan is opened, increased, repaid or closed. Each borrower therefore pays their accrued fee as the system is used, and not only when they interact with their own loan. This creates a steady stream of protocol revenue, provided that people interact with loans and the floor price keeps appreciating.

The opening fee is 0.05% of the ETH borrowed and is deducted from the ETH the borrower receives. It applies to every borrow, including additional borrows on an existing loan.

For example, suppose a user deposits 1 fpETH when the floor value is 1 ETH and borrows 1 ETH against it. The opening fee is 0.0005 ETH, so the user receives 0.9995 ETH. Later, the fpETH floor has risen to 1.2 ETH, creating 0.2 ETH of additional floor value. If the portion allocated to the fee at the current utilization is 1%, the user can access 0.198 ETH of that gain, while 0.002 ETH is paid as the fee.

As described in the dedicated Fee Router section, the fees generated by Reserve Loans are recycled back into the Polaris ecosystem, becoming part of the value distributed throughout the protocol.