(will be updated for new MMs) as of 01/30/2023
Every crypto asset in the Hatom Lending protocol has defined values related to their risk, influencing how they are supplied and borrowed.
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.
Hatom aims to work 3rd parties to provide dynamic risk parameters recommendations for the Hatom Lending Protocol.
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.
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.
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 can 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.
The delta between the Loan-To-Value and the Liquidation Threshold is a safety cushion for borrowers.
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.
The formula below allows calculating 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:
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.
Risk parameters are impacted the most by market risks:
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.
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 required coverage level, or Loan-To-Value, reduces the risk of the collateral drops 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.
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.
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.