Deep Dive: Prologue Leverage

Spice Finance
7 min readMar 3, 2023



The courageous guardians of the Spice have journeyed throughout foreign lands, sifting through the wares of every bazaar, seeking something to maximize their Spice yield.

Finally, the expedition team arrived at a cavern with a peculiar cinnamon smell. Inside, they spotted a large lever. “Could this be what we’ve been looking for?” the Captain asked, stunned.

“Yes.” A scribe points to ancient scribblings, “This is ‘Prologue Leverage’ — from the prophecy”

Lending & Leverage

The discoveries of those brave Adventurers are now being incorporated in Spice Finance’s Prologue Vault, serving as a fundamental part of its framework.

BIG NEWS: Alongside Leverage, we are releasing our first public access vault!

But before we get there, let’s first recap what Lending and Leverage are for those ‘left-of-curve’ and then we will add that dash of Spice later on.

Why Lending?

Spice’s loan system is a special feature that is only available to Prologue NFT holders. Due to the nature of the protocol, we have extensive experience with lending, which informs our loan system.

You might be wondering, “Why anyone would need our loan system when there are already many NFT lending protocols available in the market?” The reason is the loan-to-value ratios and interest rates on NFT lending platforms are usually not favorable. Additionally, the terms for settling collateral can be harsh.

In contrast, Spice’s loan system is designed to be more beneficial for both borrowers and lenders of Prologue NFTs, providing a better option for those looking to take out NFT-backed loans.

How Lending?

Okay, sure, but how does Spice solve this?

Prologue NFTs are quite special.

Spice is the first protocol to introduce a unique per-holder ETH-backed value for NFTs. This backing is analogous to your Prologue NFT position, or the $WETH you deposit into the Prologue Vault.

Prologue NFTs are ideal lending collateral due to this unique facet. They have well-known, audited, public value — similar to Uni V3 LP positions.

Spice will allow you to take out loans against the ETH-backed value of your NFT.

Existing lending platforms’ escrow contracts cannot accommodate Prologue NFT positions as Prologue NFT holders would not be able to manage their positions. Therefore, it is necessary to make custom developments to provide the functionality. The loans must stay contained within the Spice ecosystem.

Leverage Looping

Great great.. but once I get a loan what do I DO with it?

Excellent question, we go looping anon.

Available only to Prologue NFT Holders on the Spice protocol, those loaned tokens are then automatically deployed back into the Prologue Vault on behalf of the borrower. Augment your yield by looping the borrowed $WETH back into your Prologue NFT position. The maximum available LTV ratio will be 60%.

Using an average APY of ~15% for 10 $WETH, let’s see what the yield would look like:

((Position + New Loop Size) * Base APY) / 10 = New APY

As you can see, using just a few loops we were able to augment our yield to be twice what it was at the beginning.

Now, this must come at a cost, and where do all of the tokens for this leverage come from?

Let’s dive into some of those juicy intricacies.

Specific Findings

Upon the Adventurers’ return, our Spice Researchers got the opportunity to investigate the artifact, revealing many secrets that had been unknown for centuries.

Let’s review.

Leverage Vault

With Prologue Leverage, we are announcing our first public access vault!

The Leverage Vault, which funds the leverage mechanism, will be seeded by Spice, but will be open-access. Our system is designed to be accessible to all users who want to participate.

The borrow APR, or the interest rate that borrowers pay, is dynamic and can change depending on market conditions. In the event of high demand for leverage, the yield on our platform will be attractive and drive depositors seeking yield.

This system is designed to create a win-win scenario for both borrowers and depositors, providing a way for users to access loans at competitive rates while also allowing depositors to earn attractive returns.

Overall, our leverage funding system is designed to be inclusive, flexible, and rewarding for all participants.

Leverage Vault Utilization Rate

The loan terms, specifically the APR, need to be a function of Leverage Vault utilization as well as the overall LTV of the loan.

It’s important to understand that when we release leverage for Prologue NFT holders, a lot of the work under the hood is our backend pricing API.

This API uses logic similar to what we use for placing bids on P2P lending marketplaces. It will take in the requested terms of a Prologue NFT loan and return the leverage terms that can be offered to the user.

This will be based on the utilization rate of the Leverage Vault mentioned above, and the requested loan amount (LTV).

Borrow APR

If many people request leverage, the APR of the Leverage Vault will increase, causing more people to deposit. If no one requests leverage, the APR will decrease. Then Leverage Vault yields will drop, leading to less liquidity. This will in turn make leverage and looping extremely cost effective, inducing leverage demand until equilibrium is reached by market dynamics.

Borrowed tokens are automatically deployed back into the position of the Prologue NFT that was collateralized for leverage. As a result, borrowers earn a boosted yield when the borrow APR of their leverage is less than the APR they are earning in the Prologue Vault.

If you want to have a closer look at what the APR curve might look like, a visual representation will be provided in the docs ASAP.


If you’re considering using the Prologue NFT loan strategy, it’s important to be aware of the risks involved.

This strategy is not ‘liquidation-free’, which means that your loan can be liquidated under certain circumstances.

Specifically, if the total looped amount, multiplied by the liquidation LTV (80%), exceeds the amount of $ETH in your Prologue NFT position, then your loan may be subject to liquidation.

As such, it’s crucial to always keep a close eye on the health of your loan and to be vigilant in monitoring any changes or fluctuations in the market that could potentially impact your position.

You can still freely deposit into the Prologue Vault while being levered, lowering your LTV. By doing so, you can help mitigate your risk and ensure that you’re making informed decisions about your investments.


Spice Finance cannot give borrowers the same leverage terms for an infinite amount of time.

The best way to understand this statement is via an example:

Let’s imagine that someone takes out a loan at 10% APR when Leverage Vault utilization is low. After that, Leverage Vault utilization may increase a lot and other people who request leverage later will be stuck with a higher APR, even for the same LTV.

This is unfair, and not a good system, since it encourages people to maximize their leverage and reduces the number of people who are able to get leverage.

To mitigate this, every Prologue NFT loan term has a maximum of 14 days. Our auto-refinancing system provides borrowers with a convenient way to manage their loans. Every 14 days, the system automatically refinances the user’s loan to a new APR. This ensures that users always have access to the most accurate rates available without having to constantly monitor the market themselves.

While users can choose to refinance their loans to a new APR at any time, the system will do it for them automatically on day 14. The automatic refinancing process ensures that users are always on top of their loan management, without any added hassle.

With our auto-refinancing system, users can rest assured that their loans won’t expire. Loan terms are accurate to market dynamics, and leverage terms adjust to market demand.

This feature is Spice’s answer to the BIGGEST pain point with P2P lending — borrower management.


> Spice Finance is introducing Prologue Leverage, a lending and leverage system that allows Prologue NFT holders to take out NFT-backed loans based upon their unique ETH-backed value.

> The loan system works via a dual-vault setup using our novel Leverage Vault feeding into Prologue Leverage. The Leverage Vault is the first public access Spice Vault and will determine the APR and LTV for loans through a Vault Utilization Rate.

> This model is designed to be more beneficial to both borrowers and lenders, providing a better option for those looking to take out NFT-backed loans on Prologue NFTs.

> Prologue holders can augment their yield by looping the borrowed $WETH (automated by the protocol) back into their Prologue position.

> Liquidation and loan health is very important. Make sure to keep your loans healthy — you can improve LTV at any time by depositing into the Prologue Vault.

> The system auto-refinances the user’s loan to a new APR every 14 days, removing the hassle from borrowers of managing loans.

He who controls the Spice, controls the Metaverse.

If you want to join us on the journey to find Spice: