Risk parameters
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About Borrow Rate:
PAR and paUSD experienced selling pressure and depegging due to relatively low borrow rates compared to higher rates in other DeFi markets like Aave and Curve Lending., exacerbated by issues such as the depeg of jEUR on Polygon.
A measure was taken and subsequently adapted:
: Implemented partial automation of borrow rate adjustments to stabilize PAR and paUSD prices. Set interest rates between 3.00% and 18.00% per annum, with adjustments allowed every 72 hours.
: Updated to a more aggressive framework due to persistent depegging. Increased the interest rate range to 3.00% - 45.00% per annum and adjustment increments to 1.20% - 3.00% per annum. Set initial higher borrow rates for PAR and paUSD on Ethereum and Polygon.
Risks Parameters are classified by stablecoins and chains :
PAR
paUSD
The risk parameters allow to mitigate market risks of the currencies supported by the protocol. Each borrowing is guaranteed by a collateral that may be subject to volatility. Sufficient margin and incentives are needed for the position 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 position and keep the ongoing borrowing collateralised.
Market risks have the most direct impact on the risk parameters:
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.
The volatility of price can negatively affect the collateral which safeguards the solvency of the protocol and must cover the liabilities. The risk of the collateral falling below the borrowed 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.
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.
The overall risk rating is used to calibrate the Reserve Factor with factors ranging from 10% for the less risky assets to 35% for the riskiest.