Understanding FCM Basics
To understand how Flow Credit Market (FCM) works, let's build up from simple lending concepts to FCM's innovative three-component architecture.
From Traditional Lending to FCM
Level 1: Traditional Lending (Aave, Compound)
In traditional DeFi lending protocols:
_10graph LR_10 User[User] -->|Deposit FLOW| Protocol[Lending Protocol]_10 Protocol -->|Borrow USDC| User_10 User -->|Repay + Interest| Protocol_10_10 style Protocol fill:#bbf,stroke:#333,stroke-width:2px
How it works:
- Deposit collateral (e.g., 1000 FLOW worth $1000)
- Borrow up to ~75% of collateral value (e.g., $750 USDC)
- Pay interest on borrowed amount
- Your responsibility: Monitor health factor and manually manage position
Limitations: Traditional lending requires you to manually monitor and rebalance positions, quickly add collateral or repay debt if collateral price drops, manually deploy borrowed funds to avoid them sitting idle, and act fast enough to prevent liquidation.
Level 2: Automated Lending (ALP)
ALP adds automation to traditional lending:
_10graph LR_10 User[User] -->|Deposit FLOW| ALP[ALP Position]_10 ALP -->|Auto-borrow MOET| User_10_10 Price[Price Drop] -.->|Triggers| Rebalance[Auto-Rebalance]_10 Rebalance -->|Pulls funds| Source[TopUpSource]_10 Source -->|Repays debt| ALP_10_10 style ALP fill:#f9f,stroke:#333,stroke-width:2px
New features:
- ✅ Auto-borrowing: Automatically borrows optimal amount when you deposit
- ✅ Auto-rebalancing: Maintains target health ratio automatically
- ✅ TopUpSource integration: Can pull from external sources to prevent liquidation
Better, but:
- ⚠️ TopUpSource must have funds available
- ⚠️ Borrowed MOET still needs manual deployment for yield
- ⚠️ Still some manual intervention required
Level 3: FCM (ALP + FYV + MOET)
FCM completes the automation by adding yield generation:
_15graph TB_15 User[User] -->|1. Deposit FLOW| ALP[ALP Position]_15 ALP -->|2. Auto-borrow MOET| DrawDown[DrawDownSink]_15 DrawDown -->|3. Deploy| FYV[FYV Strategy]_15 FYV -->|4. Generate yield| Yield[Yield Tokens]_15_15 Price[Price Drop] -.->|Triggers| ALP_15 FYV -->|5. Provide liquidity| TopUp[TopUpSource]_15 TopUp -->|6. Repay debt| ALP_15_15 Yield -.->|Accumulates| FYV_15_15 style ALP fill:#f9f,stroke:#333,stroke-width:4px_15 style FYV fill:#bfb,stroke:#333,stroke-width:4px_15 style MOET fill:#fbb,stroke:#333,stroke-width:2px
Complete automation:
- ✅ Auto-borrowing: Instantly borrow optimal amount
- ✅ Auto-deployment: Borrowed MOET flows directly to yield strategies
- ✅ Auto-compounding: FYV strategies reinvest yields
- ✅ Auto-protection: FYV provides liquidity to prevent liquidations
- ✅ Auto-everything: True set-and-forget experience
The breakthrough:
- 🎯 Yield protects your position: Your generated yield maintains health automatically
- 🎯 No manual intervention: Everything happens automatically
- 🎯 Capital efficiency: Borrowed capital works for you immediately
Understanding the Three Components
Component 1: ALP (The Lending Engine)
What it does: Manages collateral and debt positions with automated rebalancing.
Key concepts:
- Collateral: Assets you deposit (FLOW, stFLOW, etc.)
- Collateral Factor: Percentage of collateral value you can borrow (e.g., 0.8 = 80%)
- Health Factor: Ratio of collateral to debt (must be > 1.0)
- Target Health: Optimal ratio the system maintains (typically 1.3)
Example:
_10Deposit: 1000 FLOW @ $1 = $1000_10Collateral Factor: 0.8 (80%)_10Effective Collateral: $800_10_10Target Health: 1.3_10Max Safe Borrow: $800 / 1.3 ≈ $615.38 MOET_10_10ALP auto-borrows: 615.38 MOET_10Position Health: 800 / 615.38 = 1.3 ✓
Learn more: ALP Documentation
Component 2: FYV (The Yield Engine)
What it does: Deploys capital into yield-generating strategies and provides liquidity for liquidation prevention.
Key concepts:
- Strategies: Predefined yield-generating approaches (TracerStrategy, etc.)
- AutoBalancer: Manages exposure to yield tokens and rebalancing
- DrawDownSink: Receives borrowed MOET from ALP
- TopUpSource: Provides liquidity back to ALP when needed
Example strategy (TracerStrategy):
_101. Receive MOET from ALP → DrawDownSink_102. Swap MOET → YieldToken (e.g., LP token, farm token)_103. Hold YieldToken in AutoBalancer_104. Accumulate yield over time_105. When ALP needs funds:_10 - Swap YieldToken → MOET_10 - Provide via TopUpSource_10 - ALP repays debt
Learn more: FYV Documentation
Component 3: MOET (The Unit of Account)
What it does: Serves as the currency for all operations - borrowed asset, pricing unit, and value transfer medium.
Key concepts:
- Unit of Account: All prices quoted in MOET (FLOW/MOET, USDC/MOET)
- Primary Borrowed Asset: What ALP auto-borrows and what FYV receives
- Synthetic Stablecoin: Value pegged to maintain stability
- Medium of Exchange: Flows between ALP and FYV
Why MOET?: MOET standardizes all valuations, simplifies multi-collateral calculations, is designed specifically for DeFi operations, and provides deep integration with the Flow ecosystem.
Learn more: MOET Documentation
The Capital Flow Cycle
Let's follow $1000 of FLOW through the entire FCM system:
Phase 1: Initial Deposit and Borrowing
_17You deposit: 1000 FLOW worth $1000_17↓_17ALP calculates:_17 - Effective collateral: $1000 × 0.8 = $800_17 - Target health: 1.3_17 - Borrow amount: $800 / 1.3 = $615.38 MOET_17↓_17ALP auto-borrows: 615.38 MOET_17↓_17MOET flows to: FYV strategy (via DrawDownSink)_17↓_17FYV swaps: 615.38 MOET → 615.38 YieldToken_17↓_17Status:_17 - Your ALP position: 1000 FLOW collateral, 615.38 MOET debt_17 - Your FYV position: 615.38 YieldToken generating yield_17 - Health factor: 1.3 ✓
Phase 2: Yield Generation
_14Time passes..._14↓_14FYV Strategy generates yield:_14 - Trading fees from LP positions_14 - Farming rewards_14 - Interest from lending_14↓_14Example after 1 month:_14 - YieldToken value: 615.38 → 625.00 (+1.5% return)_14 - Yield earned: ~$10_14↓_14FYV holds:_14 - Original: 615.38 YieldToken_14 - Plus accumulated yield
Phase 3: Price Drop & Auto-Protection
_24FLOW price drops: $1.00 → $0.80 (-20%)_24↓_24ALP detects:_24 - Collateral: 1000 FLOW @ $0.80 = $800 × 0.8 = $640 effective_24 - Debt: 615.38 MOET_24 - New health: 640 / 615.38 = 1.04 (below min 1.1!)_24↓_24ALP triggers rebalancing:_24 - Calculates required repayment_24 - Target debt: $640 / 1.3 = $492.31 MOET_24 - Needs to repay: 615.38 - 492.31 = 123.07 MOET_24↓_24ALP pulls from FYV (TopUpSource):_24 - FYV swaps: 123.07 YieldToken → 123.07 MOET_24 - Sends MOET to ALP_24↓_24ALP repays debt:_24 - New debt: 492.31 MOET_24 - New health: 640 / 492.31 = 1.3 ✓_24↓_24Status:_24 - ALP position: 1000 FLOW, 492.31 MOET debt, HF=1.3_24 - FYV position: ~492 YieldToken remaining_24 - Liquidation prevented! ✓
Phase 4: Price Recovery
_24FLOW price recovers: $0.80 → $1.00_24↓_24ALP detects:_24 - Collateral: 1000 FLOW @ $1.00 = $1000 × 0.8 = $800 effective_24 - Debt: 492.31 MOET_24 - New health: 800 / 492.31 = 1.625 (above max 1.5!)_24↓_24ALP triggers rebalancing:_24 - Can borrow more to reach target health_24 - Target debt: $800 / 1.3 = $615.38 MOET_24 - Can borrow: 615.38 - 492.31 = 123.07 MOET_24↓_24ALP auto-borrows:_24 - Borrows: 123.07 MOET_24 - Pushes to FYV (DrawDownSink)_24↓_24FYV deploys:_24 - Swaps: 123.07 MOET → 123.07 YieldToken_24 - Back to ~615 YieldToken_24↓_24Status:_24 - ALP position: 1000 FLOW, 615.38 MOET debt, HF=1.3_24 - FYV position: ~615 YieldToken generating yield_24 - Fully rebalanced and optimized! ✓
Key Benefits Explained
1. Yield-Powered Liquidation Prevention
Traditional protocol:
_10Price drops → Health factor drops → You must manually:_10 1. Monitor the drop_10 2. Decide: add collateral or repay debt?_10 3. Find liquidity_10 4. Execute transaction_10 5. Hope you're not liquidated first
FCM:
_10Price drops → Health factor drops → System automatically:_10 1. Detects drop instantly_10 2. Calculates exact repayment needed_10 3. Pulls from your yield_10 4. Repays debt_10 5. Restores health_10_10All in one transaction, no intervention needed!
2. Capital Efficiency
Without FCM:
_16Scenario: Have 1000 FLOW, want to generate yield_16_16Option A: Just hold FLOW_16 - Capital: $1000 working_16 - Opportunity cost: Missing yield opportunities_16_16Option B: Deposit in lending protocol_16 - Earn deposit interest: ~3% APY_16 - Capital: $1000 working_16 - Yield: ~$30/year_16_16Option C: Manual yield farming_16 - Borrow against FLOW: ~$750_16 - Deploy to farm: Complex, risky_16 - Must monitor constantly_16 - Risk liquidation
With FCM:
_10Deposit 1000 FLOW → FCM does everything:_10 - Borrow optimal amount: ~$615 MOET_10 - Deploy to best yield: Automatic_10 - Compound returns: Automatic_10 - Prevent liquidation: Automatic_10 - Potential yield: 5-15% APY (varies by strategy)_10_10Capital efficiency: Using collateral to earn yield on borrowed funds_10Risk management: Yield protects against liquidation_10Effort: Set and forget
3. Composability
Each component has value independently:
Use ALP alone when you:
- Want simple lending/borrowing
- Have your own yield strategies
- Need DeFi Actions integration
Use FYV alone when you:
- Want yield aggregation
- Don't need leverage
- Prefer direct yield farming
Use FCM together when you:
- Want maximum automation
- Desire liquidation protection
- Seek optimal capital efficiency
Understanding the Math
Health Factor Calculation
_10Health Factor = Effective Collateral / Effective Debt_10_10Effective Collateral = Token Amount × Price × Collateral Factor_10Effective Debt = Borrowed Amount × Price_10_10Example:_10 - 1000 FLOW @ $1 each × 0.8 factor = $800 effective collateral_10 - 615.38 MOET @ $1 each = $615.38 effective debt_10 - Health Factor = 800 / 615.38 = 1.30
Target Health Ranges
_10Health Factor States:_10_10HF < 1.0 → Liquidatable (immediate danger!)_10HF = 1.0-1.1 → At risk (very close to liquidation)_10HF = 1.1-1.3 → Below target (should rebalance up)_10HF = 1.3 → Target (optimal!)_10HF = 1.3-1.5 → Above target (can borrow more)_10HF > 1.5 → Overcollateralized (should rebalance down)
Borrowing Capacity
_10Maximum Safe Borrow = Effective Collateral / Target Health_10_10Example with target health of 1.3:_10 - Effective collateral: $800_10 - Max borrow: $800 / 1.3 = $615.38 MOET_10_10Why not borrow more?_10 - Need safety buffer for price volatility_10 - Target of 1.3 means 30% buffer above liquidation_10 - If you borrowed $800, health would be 1.0 (liquidatable immediately!)
Learn more: Mathematical Foundations
Common Questions
How does FCM differ from Uniswap V3?
Uniswap V3 evolved from V2 by adding:
- Concentrated liquidity (specific price ranges)
- Multiple fee tiers
- Capital efficiency improvements
- More complex LP management
FCM evolves from basic lending by adding:
- Automated position management
- Yield generation integration
- Liquidation prevention via yield
- Multi-component architecture (ALP + FYV + MOET)
Both are "evolved" versions of simpler protocols, adding complexity for better capital efficiency.
Can I use FCM without understanding all three components?
Yes! Think of it like using a car:
- User level: Just drive (deposit and earn yield)
- Enthusiast level: Understand the engine (how ALP, FYV, and MOET connect)
- Builder level: Modify and extend (create custom strategies)
Start with user level, learn more as you go.
What happens if FYV doesn't have enough liquidity for rebalancing?
Multiple fallback mechanisms:
- Primary: FYV provides from yield
- Secondary: FYV can exit positions partially
- Tertiary: Traditional liquidation (external liquidators)
- Emergency: Circuit breakers and admin intervention
The system is designed with multiple safety layers.
Is my yield always enough to prevent liquidation?
Not guaranteed, but highly likely because you're earning yield continuously, the system only pulls what's needed, the health buffer (1.3 target) provides cushion, and you can deposit more collateral anytime. Traditional protocols have 0% chance of automatic prevention - FCM gives you a strong automatic defense.
Next Steps
Now that you understand the basics:
- Learn the architecture: Architecture Overview
- Understand the math: Mathematical Foundations
- Explore components: ALP, FYV, MOET
- Start using FCM: Follow the quick start guide
Key Takeaway
FCM = Traditional Lending + Automation + Yield Generation + Liquidation Protection
It's not just "another lending protocol" - it's a complete yield-generating system with automated risk management.