Asset Risk Parameters

Establishing safeguards and limits for effective risk mitigation

Loan to Value (LTV)

The Loan to Value (”LTV”) ratio specifies the maximum amount of assets that can be borrowed with a specific collateral.

It is expressed as a percentage. For example, at LTV = 75%, for every 1 ETH worth of collateral, borrowers will be able to borrow 0.75 ETH worth of the corresponding currency.

Each asset has its own LTV.

LTV evolves with market conditions and is a variable parameter that can be adjusted via Carbon Governance.

Liquidation Threshold

The Liquidation Threshold is the LTV ratio at which a position is defined as under-collateralized and a borrower should expect to be liquidated.

Example Assuming USDC has a Liquidation Threshold of 88%, and the value of ATOM remains constant:

A user provides $1,000 USD worth of USDC and borrows the maximum allowable amount of $850 worth of other assets (85% LTV). The value of the borrowed assets increases to $950, bringing the user’s LTV ratio to 95% (thus exceeding the Liquidation Threshold of 88%). The borrower will be liquidated in order to ensure their position remains over-collateralized.

For each wallet, the Liquidation Threshold is calculated as the weighted average of the Liquidation Thresholds of the collateral assets and their value:

LiquidationThreshold=Ξ£CollateraliinETHβˆ—LiquidationThresholdiTotalCollateralinETHLiquidation\hspace{0.1cm} Threshold = \frac{Ξ£ Collateral_{i} \hspace{0.1cm}in \hspace{0.1cm}ETH*Liquidation\hspace{0.1cm}Threshold_{i} }{Total \hspace{0.1cm}Collateral\hspace{0.1cm} in \hspace{0.1cm}ETH }

Liquidation Bonus

The Liquidation Bonus is a fee rendered on the price of collateral assets when liquidators take over them, as part of the liquidation of a loan that has passed the liquidation threshold.

Liquidation Bonus for all assets are dependent on their respective liquidity risk.

The Liquidation Bonus is calculated as the difference between the Market and Liquidation Price, multiplied by the amount of collateral liquidated by the liquidator:

(MarketPrice - LiquidationPrice) x Amount of collateral liquidated

The Liquidation Bonus in percentage (%) is calculated as the difference between the Market and Liquidation Price, divided by the Market Price.

To view the Liquidation Bonus of accepted collaterals supported by Carbon's CDP module, head to Carbonscan.

Health Factor

The Health Factor is a numeric representation of the safety of your deposited assets against the borrowed assets and its underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario, and the lower the risk of the borrower defaulting on their loan. If the Health Factor reaches 1, the liquidation of your deposits will be triggered.

The Health Factor is calculated as the weighted average of the the Liquidation Thresholds of the borrowed assets and their value:

Hf=Ξ£CollateraliinETHβˆ—LiquidationThresholdiTotalBorrowsinETHH_{f} = \frac{Ξ£ Collateral_{i} \hspace{0.1cm}in \hspace{0.1cm}ETH*Liquidation\hspace{0.1cm}Threshold_{i} }{Total \hspace{0.1cm}Borrows\hspace{0.1cm} in \hspace{0.1cm}ETH }

When Health Factor <1, the position may be liquidated to maintain solvency (see illustration below).

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