Below is a basic example of how users, might borrow, lend, and trade on Covenant. This is not financial advice, and is meant as a hypothetical example.
Say Covenant has a guild that accepts stETH as collateral and offers WETH as a basis currency, with a maximum LTV of 90%. Bob has stETH and would like to borrow WETH, so he deposits 10 stETH into this guild. With collateral deposited, Bob takes out a loan of 7 WETH. At a high level, the following occurs when Bob executes the borrow.
The guild mints enough zTokens (zstETH in this case) to swap for 7 WETH, as well as the same number of dTokens. dTokens are an internal accounting token.
The zstETH are swapped for WETH on a DEX.
The rate of interest Bob pays is determined by the spot price of zTokens. The price and interest rate are inversely related, so Bob's borrow lowers the zToken price and increases the interest rate. Bob trades his zstETH at .95 zstETH/WETH. Simplifying the price/interest rate relationship, let's say this translates to a 5% interest rate. If a subsequent buyer/seller of zTokens performs another swap, Bob has to pay that corresponding rate of interest. In this way, the interest rate is floating.
In order to pay back his loan and redeem his collateral, Bob needs to hold zTokens, so he will have to buy them back. Bob will be incentivized to repay his loan when the zstETH price is below his original purchase price of .95. In addition to the lower price, the lower price means Bob is paying a higher rate of interest, an additional incentive to repay.
Bob would also need to buy zTokens to pay down part of his position, as time passes and his LTV becomes increasingly unhealthy.
Alice has WETH and wants to lend to the same guild Bob borrowed from. Lending on Covenant means swapping a guild's basis currency, WETH in this case, for the zTokens of that guild, zsETH in this case. Let's say she swaps 4 WETH and gets around 4.2 zstETH, right after Bob performed his borrow. (Note, unlike a P2P arrangement, Alice doesn't have to lend the same amount as Bob borrows. Bob's debt position accrues even when the zTokens he swapped for a loan are just sitting in the DEX LP pool.) The new spot price is .94 zstETH/WETH and the interest rate is 6%. Bob is paying 6% and Alice is getting paid 6% (minus the LP fees from the swaps).
Let's say the interest rate doesn't change over the next several months. Alice decides to withdraw her original capital, by swapping zstETH for WETH. She collects her earned interest, around 3%, along with her original capital, at this moment. Value accrues to the zToken because borrowers have to buy it to service their debt positions and pay back their loans. Liquidators also need to buy it to perform liquidations.
The interest rate is likely to remain relatively stable for a loosely pegged pair like stETH-WETH. If Alice was lending WETH on a riskier hypothetical guild, like PEPE-WETH, she might exepect more volatility, and is at greater risk of lending at a loss if she redeems her loan at a time when the interest rate spikes and the zToken for that guild falls in value.
Ted is looking at the stETH-WETH guild. He isn't interested in borrowing or lending, but he notices the zstETH/WETH price of the guild tends to revert to .95 after major borrows. A large borrower comes in, minting and selling zTokens, pushing the price down to .92. This corresponds to a roughly 8% interest rate, which Ted thinks is too high and will revert back to around 5%. He buys zTokens, just as Alice did. Sure enough, the price reverts back to .95 some hours later, and Ted sells for a 3% profit. This is roughly the same profit that Alice received, but in a much shorter timeframe. In this way, users can speculate on the interest rate of debt markets by trading zTokens.
zToken swaps occur on Uniswap V3, and Covenant does not have a separate interface for LPing. If you'd like to LP with Covenant, please find the relevant pool via Uniswap's LP interface.