Risk Parameters

Each asset in the Xpool protocol has specific values related to their risk, which influences how they are loaned and borrowed. The table below shows a summary of the latest values.

Name

Symbol

Collateral

Loan To Value

Liquidation Threshold

Liquidation Bonus

Reserve Factor

Stablecoins

Binance-Peg BUSD-T

BUSD-T

No

_

_

_

_

Binance-Peg Dai Token

DAI

Yes

75%

80%

5%

10%

Binance-Peg USD Coin

USDC

Yes

80%

85%

5%

10%

Binance-Peg BUSD Token

BUSD

No

_

_

_

10%

Other Assets

Xpool

XPO

Yes

20%

65%

10%

0%

Wrapped BNB

WBNB

Yes

80%

83%

5%

10%

Binance-Peg Ethereum Token

ETH

Yes

80%

83%

5%

10%

Binance-Peg BTCB Token

BTCB

Yes

70%

75%

10%

20%

Binance-Peg Polkadot Token

DOT

Yes

80%

83%

5%

10%

Binance-Peg ChainLink Token

LINK

Yes

80%

83%

5%

10%

Binance-Peg yearn.finance

YFI

Yes

40%

55%

15%

20%

Swipe

SXP

Yes

60%

65%

10%

20%

PancakeSwap

CAKE

Yes

60%

65%

10%

20%

The table above results from the asset risk assessment relating to security, governance and the markets. Tokens with security concerns around their smart contract cannot be considered for integration since these risks are impossible to control. Similarly, tokens which risk exposure to single counter-parties cannot be used as collateral.

Risk Parameters Analysis

The risk parameters allow to mitigate market risks of the currencies supported by the protocol. Each loan is guaranteed by a collateral that may be subject to volatility. Sufficient margin and incentives are needed for the loan to remain collateralised in adverse market conditions. If the value of the collateral falls bellow a threshold, part of it is auctioned to repay part of the loan and keep the ongoing loan collateralised.

Collateral

BUSD and BUSD-T are strongly exposed to the risk of single point of failure in their governance. Their counter-party risk is too high both in terms of centralisation and trust. For this reason, we cannot consider them to be warrant of the solvency of the protocol. BUSD and BUSD-T cannot be used as collateral.

Overall, stablecoins are mostly used for borrowing, while volatile assets which users are long on are mostly used as collateral. Hence, the users of the protocol still gain great benefits from the addition of these stablecoins. Their risks are mitigated by the fact they cannot be used as collateral.

Market risks can be mitigated through Xpool's risk parameters which define collateralisation and liquidation rules. These parameters are calibrated per currency to account for the specific risks identified as shown in Figure 2.

Loan to Value

The Loan to Value (LTV) ratio defines the maximum amount of currency that can be borrowed with a specific collateral. It’s expressed in percentage: at LTV=80%, for every 1 BNB worth of collateral, borrowers will be able to borrow 0.80 BNB worth of the corresponding currency. Once a loan is taken, the LTV evolves with market conditions.

For each wallet the maximum LTV is calculate as the weighted average of the LTVs of the collateral assets and their value:

MaxLTV=Collaterali in BNB × LTViTotal Collateral in BNBMaxLTV= \frac{\sum Collateral_i \ in \ BNB\ \times \ LTV_i}{Total \ Collateral \ in \ BNB}

Liquidation Threshold

The liquidation threshold is the percentage at which a loan is defined as undercollateralised. For example, a Liquidation threshold of 80% means that if the value rises above 80% of the collateral, the loan is undercollateralised and could be liquidated.

The delta between the Loan-To-Value and the Liquidation Threshold is a safety cushion for borrowers.

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

Liquidation Threshold=Collaterali in BNB × Liquidation ThresholdiTotal Collateral in BNBLiquidation\ Threshold = \frac{\sum Collateral_i \ in \ BNB\ \times \ Liquidation\ Threshold_i}{Total \ Collateral \ in \ BNB}

Liquidation Bonus

Bonus on the price of assets of the collateral when liquidators purchase it as part of the liquidation of a loan that has passed the liquidation threshold.

Health Factor

For each wallet, these risks parameters enable the calculation of the health factor:

Hf=Collaterali in BNB × Liquidation ThresholdiTotal Borrrows in BNBH_f = \frac{\sum Collateral_i \ in \ BNB\ \times \ Liquidation\ Threshold_i}{Total \ Borrrows \ in \ BNB}

When Hf<1H_f < 1 the loan may be liquidated to maintain solvency as described in the diagram below.

Reserve Factor

The reserve factor allocates a share of the protocol's interests to a collector contract as reserve for the ecosystem. This reserve is used to sustain the DAO and pay protocol contributors. It is made out of various assets including XPO.

Xpool's solvency risk is covered by the Safety Module, with the incentives coming from the ecosystem reserve. As such, the Reserve Factor is also a risk premium and so it is calibrated based on the overall risk of the asset. Stablecoins are the less risky assets with lower reserve factor while volatile assets hold more risk with a higher factor.

From Risks to Risk Parameters

Market risks have the most direct impact on the risk parameters:

Liquidity

The liquidity is based on the volume on the markets, which is key for the liquidation process. This can be mitigated through the liquidation parameters: the lower the liquidity, the higher the incentives.

Volatility

The volatility of price can negatively affect the collateral which safeguards the solvency of the protocol and must cover the loan liabilities. The risk of the collateral falling below the loan amounts can be mitigated through the level of coverage required, the Loan-To-Value. It also affects the liquidation process as the margin for liquidators needs to allow for profit.

Market Capitalisation

The market capitalisation represents the size of the market, which is important when it comes to liquidating collateral. This can be mitigated through the liquidation parameters: the smaller the market cap, the higher the incentives.

Overall Risk

The overall risk rating is used to calibrate the Reserve Factor with factors ranging from 10% for the less risky assets to 20% for the riskiest