Core Terms

Lending Formula

Loan-to-Value (LTV) Ratio

The core formula used in the protocol is the Loan-to-Value (LTV) ratio. The LTV ratio determines how much a borrower can borrow against their collateral. In this protocol, the LTV is capped at 80%.

LTV Formula:

LTV = Loan Amount / (Total Collateral Value * 80)

Where:

• Loan Amount is the amount borrowed.

• Total Collateral Value is the sum of the values of the assets deposited as collateral.

For example, if a borrower deposits $10,000 worth of ETH and DAI, they can borrow up to $8,000 (80% of $10,000).

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Health Factor (HF):

The health factor is a critical aspect of the protocol’s risk management. It is used to determine whether a borrower’s collateral is still sufficient to cover their loan. The health factor is calculated as:

HF = (Collateral Value * LTV) / Loan Amount

• If HF > 1, the loan is safe.

• If HF < 1, the loan is under-collateralized and eligible for liquidation.

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Liquidation Threshold:

To prevent abrupt liquidation, a buffer is set in place. The liquidation threshold is 85% LTV, meaning if the LTV ratio of a loan exceeds 85%, liquidatoin can occur.