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- 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 | Max Initial LTV | 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% |
| TrueUSD | TUSD | 60 | 85 | 5% | 2% |
| Maker | MKR | 60 | 85 | 5% | 2% |
| Basic attention token | BAT | 60 | 85 | 5% | 2% |
| 0x | ZRX | 60 | 85 | 5% | 2% |
| Augur | REP | 60 | 85 | 5% | 2% |
| WBTC | WBTC | 60 | 85 | 5% | 2% |
| LINK | Chainlink | 60 | 85 | 5% |
2% |
Loan to Value (LTV)
The LTV ratio defines the value of the loan relative to the value of the collateral.
Max Initial LTV
For all loans, we require an LTV of at least 60% This means the loan amount can be no greater than 60% of the value of the collateral. So, for every 1 ETH worth of collateral, a borrower is able to borrow 0.60 ETH worth of the corresponding digital asset. (For example, if a borrower receives $600 worth of DAI, he/she must deposit $1000 worth of ETH.)
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 a 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 Max Initial LTV (60%) 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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