Risk Parameters
as of 08/03/2022
Every crypto asset in the Hatom protocol has defined values related to their risk, influencing how they are supplied and borrowed. Gauntlet is optimizing these parameters weekly based on the market conditions.

Risk Parameters Change

Risks change following the changes in market conditions. The assets integrated into the Hatom protocol require constant monitoring as the risk parameters must be continuously adapted to the current market state. You can find below a table that tracks the parameter changes.

Dynamic Risk Parameter

Hatom aims to work with Gauntlet to provide dynamic risk parameters recommendations for the Hatom Protocol.

Risk Parameters Analysis

The risk parameters can reduce the market risks of the crypto assets available on the lending platform. Every single loan is protected by collateral that can be subject to volatility. For a position to stay collateralized, it needs sufficient margin and incentives. In case the value of the collateral decline below a threshold, a fragment of it is sold to liquidators to repay a part of the position and to maintain the loan collateralized.

Collaterals

Stablecoins are the most borrowed assets in a lending protocol, as users prefer to use volatile assets they are long on as collateral. This way, the users can get liquidity without closing their position and selling their assets.
Hatom’s risk parameters define collateralization and liquidation rules and help reduce market risks. These parameters are unique for each asset to solve the specific risk identified for each asset.

Loan to Value

The maximum amount of an asset that can be borrowed with a particular collateral is defined by the Loan to Value (LTV). The (LTV) is expressed in a percentage. For example, if LTV=80%, borrowers will be able to borrow 0.8 EGLD worth of the available assets for every 1 EGLD worth of collateral they supply. The LTV evolves following market conditions once a borrow has been taken.

Liquidation Threshold

The delta between the Loan-To-Value and the Liquidation Threshold is a safety cushion for borrowers.

Liquidation Penalty

A liquidation penalty (or liquidation incentive) is the cut in price at which a liquidator receives a user’s collateral when a loan has passed the liquidation threshold.

Health Factor

The formula below allows to calculate the health factor based on the risks parameters:
The position is subject to liquidation if Hf<1 to conserve solvency, as described in the diagram below:

Reserve Factor

The portion of borrower-paid interest (per second) that goes to the reserve. The remainder of the borrower-paid interest goes to the MM’s suppliers.

From Risks to Risk Parameters

Risk parameters are impacted the most by market risks:

Liquidity

The liquidity is key for the liquidation process, it’s based on the volume of the markets. The liquidation process can be prevented through the liquidation parameters: when the liquidity is low, the incentives are high.

Volatility

The collateral assures the stability of the lending platform and has to cover the liabilities, it is directly and negatively affected by the volatility.
The level of coverage required or Loan-To-Value, reduce the risk of the collateral dropping below the borrowed amount. The liquidation process is also affected as the margin for liquidators has to allow for profit.
USDC Stablecoin is the crypto asset with less volatility, followed by EGLD. They both have the highest LTV at 70% and the highest liquidation threshold at 75%.
Holoride is the crypto asset with the lowest LTV at 50%. Its liquidation threshold is set at 55% to prevent our users from an unexpected price drop resulting in under collateralization followed by liquidation.

Market Capitalisation

The market size is represented by market capitalization. It is essential to the process of collateral liquidation. The collateral liquidation process can be prevented through the liquidation parameters: when the market cap is low, the incentives are high.

Overall Risk

The overall risk is a rating that defines the level of risk of each Money Market separately. The Reserve Factor has been set to 20% for all the Money Markets.
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Outline
Risk Parameters Change
Dynamic Risk Parameter
Collaterals
Loan to Value
Liquidation Threshold
Liquidation Penalty
Health Factor
Reserve Factor
From Risks to Risk Parameters