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- Collateral Factor
- Borrowing Power
- Loan to Value (LTV) requirements
- Liquidation
Collateral is required for all loans on DeFiner to prevent lenders from default events. When a borrower originates a loan (either a peer-to-peer loan or from a savings account), they are asked to pledge their collateral into a DeFiner smart contract where it is locked. Only once the smart contract receives the collateral, will the borrower then be assigned the credit/borrowing power from the smart contract.
We use the following LTV terms to measure and control default risks:
| Token name | Token Symbol | Collateral Factor | LTV Liquidation Threshold | Forced-Liquidation Collateral Discount | Self - Liquidation Collateral Discount |
| DAI | DAI | 60 | 85 | 5% | 2% |
| USD Coin | USDC | 60 | 85 | 5% | 2% |
| Tether | USDT | 60 | 85 | 5% | 2% |
| Maker | MKR | 60 | 85 | 5% | 2% |
| Basic attention token | BAT | 60 | 85 | 5% | 2% |
| WBTC | WBTC | 60 | 85 | 5% | 2% |
| LINK | Chainlink | 60 | 85 | 5% |
2% |
Collateral Factor
The collateral factor is the maximum percentage a user can borrow against a collateral asset.
For example, if the collateral factor for ETH is 70%, for 1 ETH collateral, a borrower is able to borrow 0.70 ETH worth of the corresponding crypto asset. (For example, if a borrower receives $700 worth of DAI, he/she must deposit $1000 worth of ETH.)
Borrowing Power
Borrowing power is how much a user can still borrow against the collateral. it is calculated by the sum of each collateral asset multiple the coresponding collateral factor then minus borrow the balance. If borrowing power is below or equal to zero, the user cannot borrow any crypto from the account. If borrowing power is above zero, this means the user can borrow a maximum of this borrowing power amount of crypto assets from the protocol.
Loan to Value (LTV)
The LTV ratio defines the value of the loan relative to the value of the collateral. The LTV is self-calculated in real-time.
Forced Liquidation
- Sufficient margin and incentives are needed for the loan to remain collateralized in adverse market conditions. If the value of the collateral drops below a certain point, there will be a forced market sale (liquidation) to cover the outstanding loan principal plus interest owed to lenders.
- Our Forced Liquidation Threshold is when the LTV reaches 85%. This means if the value of ETH (being used as collateral) drops and the loan amount now reaches 85% of the value of the collateral, a forced sell will occur (at a 5% price discount) to repay part of the loan sufficient to decrease the LTV to Max Initial LTV level.
Self-Liquidation: payback loan with collateral
In a case where collateral value is dropping but hasn't yet reached the point of forced liquidation, the borrower can call a self-liquidation. In doing so, a portion of their collateral will be auctioned at a 2% market price discount to repay the loan. This option allows the borrower to repay the loan without securing extra cash and avoiding forced liquidation.
In a liquidation event, a 3rd party liquidator provides liquidity to payback the loan. In return, they receive the underlying collateral at a discounted price. This is a 5% Forced-Liquidation Collateral Discount to attract liquidators to participate in the collateral auction of forced liquidations. Similarly, this process allows a 2% Self-Liquidation Collateral Discount to attract liquidators to participate in the collateral auction of self-liquidations.
Risk assessment
The Collateral Factor and Forced Liquidation LTV (85%) are assessed based on a digital asset's liquidity and market capitalization. The liquidity is based on the volume of the markets, which is key for the liquidation process. This is mitigated by the parameters: the lower the liquidity, the higher the incentives. Market capitalization represents the size of the market, which is also important when it comes to liquidating collateral. This is mitigated by these parameters: the smaller the market cap, the higher the incentives.
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