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Asset Parameters
Asset Valuation and Borrowing Capacity
Dynamic Loan to Value (LTV)
At PhoLend, the Loan to Value ratio serves as a crucial metric in determining the borrowing limits based on the collateral provided by users. This ratio is sensitive to market dynamics, reflecting real-time asset valuation and associated risk levels. For instance, an LTV set at 75% means that for every 100 units of XFI collateralized, a user can borrow up to 75 XFI. This mechanism adjusts to maintain alignment with current market conditions, ensuring the platform's stability and user confidence.
Calculating Optimal LTV
PhoLend employs a sophisticated model to calculate an optimal LTV for each user by taking a weighted average of the LTVs for all collateralized assets. This approach factors in the market value and stability of each asset, ensuring a balanced assessment of risk across the user’s portfolio. Such calculations are vital for maintaining financial integrity and mitigating undue exposure to market volatility.
Risk Management and Liquidation Protocols
Strategic Liquidation Thresholds
The liquidation threshold is a safety measure that dictates when an automated sale of collateral is triggered to cover outstanding loans. Setting this threshold typically around 80% provides a buffer against market volatility, safeguarding both the borrower and the platform. When the market value of the collateral falls such that the loan value breaches this threshold, PhoLend initiates a controlled liquidation process to mitigate potential losses.
Incentivizing Liquidation through Bonuses
PhoLend acknowledges the risks liquidators assume in the process of loan recovery. Therefore, it offers liquidation bonuses, additional financial rewards to those who undertake the task of liquidating loans that fall below the health factor threshold. These bonuses are set in proportion to the complexity and urgency of the liquidation, ensuring efficient and timely risk management.
Financial Health Indicators
Monitoring with Health Factor
The health factor is an essential gauge used on PhoLend to assess the risk of a loan defaulting. A value below 1 signals potential danger, indicating that the loan is becoming unsustainable and might require intervention. This factor is a critical tool for users to manage their loans proactively, ensuring they remain within safe operational thresholds.
Reserve Factor and Its Impact
The reserve factor is a portion of the accrued interest that is allocated to a reserve fund, which supports the operational and financial stability of the PhoLend ecosystem. This factor is variably set based on the asset's risk profile; assets with lower volatility, such as stablecoins, typically have a lower reserve factor, while more volatile assets feature a higher reserve factor.
Market Risks and Their Impact on Borrowing
Liquidity: The ease with which assets can be bought or sold in the market without affecting their price is crucial, especially during liquidation events. Lower liquidity necessitates higher liquidation bonuses to ensure prompt execution.
Volatility: The frequency and magnitude of price changes in the collateral's value can significantly impact loan safety. Higher volatility increases the risk of the collateral value dipping below the required loan coverage, potentially triggering liquidation.
Market Capitalization: The overall market value of an asset influences liquidation dynamics. Assets with smaller market caps might require higher incentives for liquidators to engage in the liquidation process effectively.
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