Asset / Liquidity Risk
Liquidation is a process that occurs when a borrower's health factor falls below 1 due to their collateral value insufficiently covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other. This collateral vs loan value ratio is shown in the health factor. Each asset in the Multi-Chain Lend (MCL) protocol has specific values related to their risk, which influences how they are loaned and borrowed. The table below shows a summary of the latest values.
Name | Symbol | Collateral | Loan To Value | Liquidation Threshold | Liquidation Bonus |
Binance | BNB | Yes | 65% | 70% | 10% |
BUSD | BUSD | Yes | 75% | 80% | 10% |
Bitcoin | BTC | Yes | 75% | 80% | 10% |
USDC | USDC | Yes | 75% | 80% | 10% |
Tether | USDT | Yes | 75% | 80% | 10% |
DAI | DAI | Yes | 75% | 80% | 10% |
Ethereum | ETH | Yes | 75% | 80% | 10% |
LINK | LINK | Yes | 65% | 70% | 10% |
Cardano | ADA | Yes | 65% | 70% | 10% |
Polkadot | DOT | Yes | 65% | 70% | 10% |
Litecoin | LTC | Yes | 65% | 70% | 10% |
Bitcoin Cash | BCH | Yes | 65% | 70% | 10% |
The table above results from the asset risk assessment relating to security, governance and the markets.
Risk Parameters Change
When market conditions change, risks change, and so we are always monitoring the assets integrated into the protocol which sometimes requires quick adaptation of the risk parameters.
Risk Parameters Analysis
The risk parameters allow the mitigation of market risks of the cryptocurrencies supported by the protocol. Each loan is guaranteed by a collateral which may be subject to volatility. Sufficient margin and incentives are needed for the loan to remain collateralized in adverse market conditions. If the value of the collateral falls below the liquidation threshold, part of it is auctioned off to repay part of the loan to keep the remaining loan collateralized.
Collaterals
Overall, stablecoins are mostly used for borrowing, while volatile assets which users are long on are mostly used as collateral. Hence, the users of the protocol still gain great benefits from the addition of these stablecoins. Their risks are mitigated by the fact they cannot be used as collateral.
Market risks can be mitigated through Multi-Chain Lend (MCL) protocol’s risk parameters which define collateralization and liquidation rules.
Loan to Value (LTV)
The Loan to Value (LTV) ratio defines the maximum amount of cryptocurrency that can be borrowed with a specific collateral. It’s expressed in percentage: at LTV 60%, for every 1 BTC worth of collateral, borrowers will be able to borrow 0.6 BTC worth of the corresponding currency. Once a loan is taken, the LTV evolves with market conditions.
Liquidation Threshold
The liquidation threshold is the percentage at which a loan is defined as undercollateralized. For example, a Liquidation threshold of 80% means that if the value rises above 80% of the collateral, the loan is undercollateralized and could be liquidated.
The delta between the Loan-To-Value and the Liquidation Threshold is a safety cushion for borrowers.
Liquidation Bonus
Bonus on the price of assets of the collateral when liquidators purchase it as part of the liquidation of a loan that has passed the liquidation threshold.
Health Factor
For each loan, these risks parameters enable the calculation of the health factor:.
When​ the loan is under-collateralized, it may be liquidated to maintain solvency as described in the diagram below.
From Market Risk to Risk Parameters
Market risks are assessed on 3 levels which have different effects on the risk parameters:
The liquidity is based on the volume in the markets, which is key for the liquidation process. This can be mitigated through the liquidation parameters: the lower the liquidity, the higher the incentives.
Volatility
The volatility of the cryptocurrency price can negatively affect the collateral which safeguards the solvency of the protocol and it must cover the loan liabilities. The risk of the collateral falling below the loan amounts can be mitigated through the level of coverage required, the Loan-To-Value. It also affects the liquidation process as the margin needs to account profit for the liquidators.
The stablecoins which are less volatile, followed by ETH and BTC have the highest LTV at 75%, and the highest liquidation threshold at 80%.
Market Capitalization
The market capitalization represents the size of the market, which is important when it comes to liquidating collateral. This can be mitigated through the liquidation parameters: the smaller the market cap, the higher the liquidation bonus.
