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Collateral refers to the assets that one must pledge in order to take out a loan. This is to ensure the credibility of the borrower and to secure the loan. In the event that the borrower defaults, the collateral can be seized as a failsafe to repay the loan value. To ensure the safety of all user’s funds, all loans are over-collateralized. For example, for $100 of collateral locked in, a user can borrow ~$75 worth of assets.
If the borrower’s collateral’s nominal value falls at some point, against the value of the loan, they are at a risk of liquidation.
To prevent this scenario, Nitron provides the option to adjust the user's collateral accordingly to stabilize the user's position. This is an advanced feature that can affect the user's health factor when the users add or remove collateral, hence ensure that users are careful while adjusting the same.
Health factor refers to the numerical scale of the safety of a user's collateral against their borrowings. The health factor aggregates the user's position across all assets to assess the point at which the user is subject to liquidation.
The higher the user's health factor, the lower the chance of liquidation. At any given time, if a user’s health factor is falling to close to 1, the user can add more collateral or return the user's borrowings to stabilise their position.
If the Health Factor falls below 1, a user’s collateral may be liquidated until the Health Factor goes back above 1.
The loan to value (LTV) ratio indicates the maximum value of assets that can be borrowed against a specific collateral. It is expressed as a percentage, for example if ATOM has an LTV of 50%, for every 1 ATOM worth of collateral deposited, borrowers can borrow a maximum of 0.5 ATOM worth of whichever asset they wish to borrow.
Once a borrow occurs, the LTV will change based on changes in the market price of the collateral or borrowed asset changes, so users have to monitor closely to ensure their LTV does not hit the liquidation threshold to avoid liquidations. Liquidation Threshhold The liquidation threshold is the percentage at which a position is defined as undercollateralised. For example, a liquidation threshold of 80% means that if the loan value rises above 80% of the collateral, the position is undercollateralised and is open to being liquidated.
The difference between the LTV and the liquidation threshold acts as a buffer, and is a safety mechanism in place for borrowers to prevent instant liquidations if the maximum LTV was utilized.
Whenever a collateral’s health factor drops below 1, it becomes undercollateralized and anyone can liquidate the loan by repaying the debt and taking the borrower’s collateral at a discounted rate.
This discounted rate is also referred to as liquidation bonus, the difference in the actual value of the collateral and the discounted amount the user pays for it.
The user can select the debt they want to repay as long as they have sufficient amount in their wallet, and which collateral they want to receive in exchange for repaying the debt.
The liquidation bonus is the difference between the actual notional value of the collateral you have seized and the value that you have paid to seize it.
Isolation mode (here after referred to as “IM”) refers to assets that have been marked due to low liquidity, high volatility, or price action, and is usually used for newer assets which are riskier.
Under IM, the user can still supply IM assets to be lent out, however if the user chooses to collateralise it to borrow against it, the user cannot collateralize other assets. The “Edit Collateral” option is also disabled on IM assets during this time.
The user can also still mint Carbon stablecoin or borrow stablecoin if they have IM assets as collateral.
However, the user cannot borrow any other assets besides stablecoins when they are holding IM assets as collateral.
Users can turn off isolation mode by disabling the isolated asset as collateral. This can be done only if the user has no outstanding debt.
Net APY is the net yield that a user earns based on the combined effect of their lendings and borrowings.
Net APY% = Aggregated APY earned from each individual market + external incentives earned - interest paid on loans
If a user borrows more than they lend, they will have a negative APY% as more interest is paid than earned.
The interest is the additional cost of taking a loan. At the time of repayment, the user pays back the borrowed amount plus the interest accrued on the loan. The interest amount is based on the demand and supply of the respective asset in the money market.