🔒Risk Management

Echelon Markets was designed in accordance with our commitment to protocol stability and follows best practices adopted by other lending markets. In this section, an overview of the specific protocol features designed to mitigate risk is outlined.

Risk Parameters

Each asset in the Echelon Markets protocol has specific risk values that affect how they're used for lending and borrowing. V1 enhances risk mitigation with additional parameters focusing on security, governance, and market dynamics.

Understanding the risks associated with each asset is crucial, including smart contract security, centralization risks, and market dynamics. Assets bring their inherent risks into the Echelon Markets ecosystem. V1 introduces advanced risk parameters, facilitating the onboarding of high-risk assets with defined limits.

Assets in Echelon Markets are added through governance proposals or by Asset Listing Admins appointed by governance.

Risk parameters in Echelon Markets mitigate market risks. In V1, each loan requires over-collateralization with assets subject to market volatility. Adequate margins and incentives are vital to maintain collateralization during adverse market conditions. If collateral value falls below a set threshold, a portion is liquidated to repay debt and maintain collateralization.

These parameters, including collateralization and liquidation rules, are asset-specific.

V1 introduces tried and true risk parameters for enhanced protection against insolvency:

  1. Supply Caps: Limit the maximum supply of an asset to the protocol, based on on-chain liquidity and total collateral volume.

  2. Borrow Caps: Set a maximum borrow limit for an asset to prevent price exploits and insolvency risks.

  3. Efficiency Mode (eMode): Allows higher LTVs for correlated assets like stablecoins and Liquid Staking Derivatives (LSDs).

Liquidation Threshold

Echelon determines the risk of a loan through the Liquidation Threshold, which is calculated by the weighted average of each collateral type against the total collateral.

When the loan's value relative to the collateral exceeds this threshold, the loan is at risk of being liquidated to protect the protocol's financial health.

Liquidation Penalty and Factor

A Liquidation Penalty is incurred on the collateral's value during liquidation, serving as a fee for the liquidation process. The Liquidation Factor decides how much of this penalty is directed to the ecosystem's treasury, ensuring a balance between user protection and protocol sustainability.

Health Factor

The Health Factor is a critical gauge of an account's risk, reflecting the proportion of collateral to borrowed assets. It accounts for market fluctuations and collateral performance.

A Health Factor below 1 indicates that the account is under-collateralized, prompting potential liquidation to preserve the protocol's solvency.

Reserve Factor

Allocates a portion of protocol interest to the ecosystem treasury, calibrated based on asset risk.

Collateral Usage

Certain assets, like USDT and sUSD, are limited to Isolation Mode due to high centralization risks. In contrast, certain assets may, despite being decentralized, not be used as collateral due to limited testing and liquidity. Up to date information for a specific pool’s allowed criteria can be found on the Borrow page of the Echelon App.

Market risks directly influence risk parameters, with liquidity and volatility playing key roles. The most volatile assets have lower LTV and higher liquidation thresholds, while more stable assets like stablecoins, APT, and Liquid Staked APT have higher LTV limits.

Max LTV & liquidation threshold are set per market, while liquidation bonuses and reserve factors are global.

Echelon Markets designs these parameters to be dynamic, reflecting real-time market conditions and maintaining a stable lending environment.

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