Risk Parameters
The risk parameters mitigate the market risks of the assets supported by the Tulia protocol. Each borrow is based on an over-collateralization with a different asset that may, be subject to volatility. Sufficient margin and incentives are needed for the position to remain collateralised in the event of adverse market conditions. If the value of the collateral falls below a predetermined threshold, a portion of it will be auctioned as a LIQUIDATION_BONUS to repay a portion of the debt position and keep the ongoing borrow collateralised.
Market risks can be mitigated through Tulia’s risk parameters, which define collateralisation and liquidation rules.
These parameters are calibrated on a per asset basis to account for the specific risks identified.
Supply Caps
Supply caps define the maximum amount of an asset which can be supplied to the protocol. Supply caps can be used to limit the protocol’s exposure to riskier assets and protect against infinite minting exploits. A supply cap is an optional parameter, and the value will depend on on-chain liquidity of the asset and total volume of collateral assets in the pool.
Borrow Caps
Borrow caps define the maximum amount of an asset which can be borrowed. Borrow caps can be used to prevent traditional and flash borrowing of an asset which may experience a price exploit and lead to protocol insolvency. A borrow cap is an optional parameter, and the value will depend on-chain liquidity of the asset and total volume of borrowed assets in the pool.
Isolation Mode
Isolation mode can be used to limit the systemic risk of listing riskier assets. Isolation mode limits an asset to only borrow isolated stablecoins and only use a single isolated asset as collateral at a time.
eMode
Efficient Mode (”eMode”) allows assets which are correlated in price (e.g., DAI, USDC, and USDT) to be listed in the same eMode category which maximises capital efficiency by allowing higher LTVs when both the borrowed and collateral asset belong to the same eMode category.
Loan to Value
The Loan to Value (”LTV”) ratio defines the maximum amount of assets that can be borrowed with a specific collateral. It is expressed as a percentage (e.g., at LTV=75%, for every 1 ETH worth of collateral, borrowers will be able to borrow 0.75 ETH worth of the corresponding currency). Once a borrow occurs, the LTV evolves with market conditions.
Liquidation Threshold
The liquidation threshold is the percentage at which a position is defined as undercollateralised. For example, a Liquidation threshold of 80% means that if the value rises above 80% of the collateral, the position is undercollateralised and could be liquidated.
The delta between the LTV and the Liquidation Threshold is a safety mechanism in place for borrowers.
If the result (LT) is greater than or equal to 1, the loan is considered safe. However, if LT falls below 1, it indicates that the value of the debt exceeds the liquidation threshold of the collateral, making the position vulnerable to liquidation.
Liquidation Penalty
The liquidation penalty is a fee rendered 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.
Liquidation Factor
The liquidation factor directs a share of the liquidation penalty to a collector contract from the ecosystem treasury.
Health Factor
The health factor is a critical metric used in platforms like Aave to measure the safety of a loan in relation to the collateral provided. It is calculated using the following:
The health factor is calculated using the formula:
Reserve Factor
The Reserve Factor directs a portion of the protocol’s generated interest into an ecosystem treasury via a collector contract.
The Safety Module, which is in place to mitigate Aave's solvency risk, is supported through incentives funded by the ecosystem reserve. Therefore, the Reserve Factor is adjusted according to the asset's risk; lower for stablecoins due to their reduced risk, and higher for more volatile assets reflecting their increased risk.
Collaterals
USDT and sUSD, due to their centralized governance structures, present heightened counterparty risks, including the risks of single points of failure. This centralization and reliance on trust significantly elevate their risk profiles, rendering them unsuitable for guaranteeing the protocol's solvency. Consequently, these assets are confined to use in Isolation Mode when it comes to collateral. Conversely, decentralization characterizes assets like agEUR and jEUR but their novelty and lack of extensive testing hinder their acceptance as collateral.
Stablecoins are integral to the protocol, facilitating both borrowing and serving as collateral, whereas volatile assets are predominantly utilized as collateral. This distinction ensures that the protocol users continue to benefit from the inclusion of stablecoins, with the associated risks controlled by restricting their use as collateral.
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