Collateral Model
Last updated
Last updated
In order to protect deposits against repayment default, Securd has implemented a Collateral Model ensuring that the LP Tokens locked by a Borrower can always cover the amount borrowed.
Like most DeFi lending protocols, Securd protects Depositors from repayment defaults by requiring Borrowers to pledge assets against their loans.
In order for this protection to be efficient:
the Collateral Token and the Loan Token should be positively correlated
the Liquidation Threshold should be defined such that when a liquidation is triggered, the proceeds from the collateral sale is large enough to repay the corresponding loans.
The first condition is guaranteed since LP Tokens are natively correlated to their underlying tokens, ensuring a stable Collateral Factor. Hence, Securd offers stronger capital protection than any other lending protocol on the market. The Graph below illustrates this behaviour by comparing the Collateral Factor's stability when the price of Token A vs Token B changes, in 2 cases:
A loan 50% in Token A and 50% in Token B with LP Token A/B as collateral
A loan 100% in Token A with Token B collateral
For the second condition, Securd splits LP Tokens in 3 categories based on multiple criteria such as correlation or liquidity pool size. The full methodology will be disclosed in a future publication.
For each category, we determine a price jump that the Collateral can handle before dropping below the loan value. Based on that price jump, we are able to compute 2 different Liquidation Thresholds:
Balanced Liquidation Threshold or BLT, corresponding to 2 equivalent loans in Token A and Token B
Unbalanced Liquidation Threshold or ULT, corresponding to a single loan in Token A.
| Category | Price Jump | BLT | ULT |
|---|---|---|---|
AAA | 200% | 122% | 182% |
BBB | 300% | 132% | 211% |
CCC | 400% | 141% | 235% |
The actual Liquidation Threshold LT is a weighted average between BLT and ULT based on the Loan Balance ratio of Token A to Token B.
However, not all LP Tokens are equivalent. Depending on the volatility of the token pair or the pool size, a LP Token can be more or less risky to use as collateral.
For each risk category, a jump c is calibrated and will define how to compute the liquidation threshold. Our LP Token Rating Methodology is disclosed here.
