Deposit Mode Explained

Deposit Mode is the alternative for borrowers who don't have (or don't want to set up) a Safe wallet. It uses economic incentives instead of technical locks.

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How It Works

The Concept

You keep your NFT but put down a 20% ETH deposit as security:

You want to borrow: 1 ETH
Your deposit:       0.2 ETH (20%)
You receive:        1 ETH
Your NFT:           Stays in your wallet (with approval)

If you repay:       Get deposit back
If you default:     Lose NFT + deposit
If you cheat:       Lose deposit immediately

The Approval

When you create a loan request or accept an offer, you approve the NFT Loans contract to transfer your NFT. This approval is how the contract can liquidate if you default.

The Trust Model

Unlike Safe Guard Mode, the contract doesn't FORCE you to keep the NFT. You COULD:

• Transfer it to another wallet
• Revoke the approval
• Approve someone else and have them take it

But if you do any of these, your deposit is slashed.

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Why the Deposit?

The deposit makes cheating unprofitable:

Scenario: You Cheat

You borrow:    1 ETH
Your deposit:  0.2 ETH
NFT floor:     2 ETH

You transfer NFT away and keep the borrowed ETH.

Your gain:     1 ETH (borrowed) + 2 ETH (NFT) - 0.2 ETH (deposit) = 2.8 ETH
Your cost:     0.2 ETH deposit
Net:           2.8 ETH profit from cheating 😈

Wait, that's profitable! So why does it work?

The Deterrent

1. Reputation: You'll be known as a cheater in the community
2. Blacklist: The protocol can blacklist your address
3. Detection: Cheating is publicly visible on-chain
4. Speed: Anyone can report you immediately

The deposit doesn't fully prevent cheating economically—it provides SOME compensation to the lender and creates friction. That's why:

• Deposit Mode has higher interest rates
• Lenders can choose to only accept Safe Guard loans
• It's better than nothing for EOA users

Minimum Viable Honesty

For borrowers who intend to repay, Deposit Mode works fine. The deposit is just locked temporarily and returned when you repay.

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The Cheating Detection System

What Counts as Cheating?

1. Transferring the NFT - Moving it to any other address
2. Revoking approval - Removing the contract's ability to liquidate
3. Approving others - Letting someone else transfer it (detected on transfer)

How It's Detected

Anyone can call reportCheating(loanId):

// Check if borrower still owns NFT
if (NFT.ownerOf(tokenId) != borrower) → CHEATING

// Check if approval is still valid
if (!approved(lendingContract)) → CHEATING

What Happens When Reported

1. Loan marked as LIQUIDATED
2. Deposit slashed to lender
3. Event emitted (CheatingReported)
4. Borrower doesn't get NFT back (it's gone)
5. Lender doesn't get NFT (it's gone)

Who Reports?

• Lenders monitoring their loans
• Community members
• Automated bots (keeper services)
• Anyone who notices

There's no reward for reporting currently—it's a public good.

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Loan Flow

Creating a Loan Request

1. You approve NFT Loans for your NFT
2. You submit request WITH 0.2 ETH deposit
3. Deposit is escrowed
4. Request visible to lenders
5. You can cancel anytime → deposit returned

Accepting an Offer

1. You approve NFT Loans for your NFT
2. You accept offer WITH 0.2 ETH deposit
3. Loan immediately ACTIVE
4. You receive principal
5. NFT stays in your wallet

Repaying

1. Send repayment (principal + interest)
2. Loan marked REPAID
3. Deposit returned to you
4. Approval no longer matters

Defaulting

1. Maturity passes + 24hr grace period
2. Anyone calls liquidate()
3. Contract transfers your NFT to lender (using approval)
4. Deposit sent to lender
5. You keep the borrowed ETH

Cheating

1. You transfer NFT or revoke approval
2. Someone notices and calls reportCheating()
3. Deposit slashed to lender
4. Loan marked LIQUIDATED
5. Lender doesn't get NFT (you took it)

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Advantages of Deposit Mode

Benefit	Details
Any Wallet	Works with regular wallets (EOA)
No Setup	Just approve and go
Immediate	No 24-hour activation delay
Flexible	Keep using your wallet normally

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Disadvantages

Drawback	Details
Deposit Required	Need 20% of principal upfront
Higher Rates	Lenders charge more for the risk
Cheating Risk	You COULD cheat (but face consequences)
Requires Approval	Contract needs NFT approval

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Important Rules

DO

• Keep the NFT in your wallet
• Keep the approval active
• Repay on time
• Monitor your loan status

DON'T

• Transfer the NFT anywhere
• Revoke the approval
• Approve other contracts for the NFT
• "Accidentally" lose access to the wallet

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Economics

Deposit Calculation

Deposit = Principal × 20%

Example:

• Borrow 1 ETH → Deposit 0.2 ETH
• Borrow 5 ETH → Deposit 1 ETH
• Borrow 0.5 ETH → Deposit 0.1 ETH

Net Cash Flow on Acceptance

You send:    Deposit (0.2 ETH)
You receive: Principal (1 ETH)
Net:         +0.8 ETH in your wallet

On Repayment

You send:    Principal + Interest (e.g., 1.01 ETH)
You receive: Deposit (0.2 ETH)
Net:         -0.81 ETH from your wallet

On Default

You lose:    NFT + Deposit
You keep:    Borrowed ETH

On Cheating

You lose:    Deposit (0.2 ETH)
You keep:    NFT + Borrowed ETH
Net:         You're up, but blacklisted

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When to Use Deposit Mode

Good Fit

• You don't have a Safe wallet
• You need funds immediately (no 24hr delay)
• You're borrowing a small amount (deposit is manageable)
• You definitely plan to repay

Bad Fit

• You have or can create a Safe (use Safe Guard instead!)
• You want the best interest rates
• The deposit amount is burdensome
• You're tempted to cheat (please don't)

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FAQ

Why 20%?

It's a balance:

• Too low: Cheating is too profitable
• Too high: Barrier to borrowing

20% is a starting point. The protocol admin can adjust this.

Can I add more deposit for better rates?

Not currently. The deposit is fixed at 20%. Lenders set rates based on mode, not deposit amount.

What if I legitimately need to move my NFT?

You can't while the loan is active. Repay first, then move it.

What if I lose access to my wallet?

You'll default and lose the NFT + deposit. Keep your keys safe.

Can I use Deposit Mode with a Safe?

Technically yes, but why would you? Safe Guard Mode is strictly better if you have a Safe.

What prevents mass cheating?

• Social reputation in the 6529 community
• On-chain record of cheating
• Blacklisting
• Community monitoring

This is why we recommend Safe Guard Mode for larger loans.