Collateral and Debt Caps

Minimizing systemic risk

Collateral and Debt Caps in Curvance

Collateral and debt caps are both core safeguard for the lending markets, setting limits on how much of an asset may be used as collateral and how much may be borrowed. These caps help protect the protocol against bad debt and reduce incentives for manipulation by constraining market-wide exposure on both the collateral and borrow sides.

Purpose and Function of Collateral Caps

While the protocol allows unlimited vault deposits to earn yield, only a percentage of total assets in each market can be used as collateral for borrowing. By setting these collateral caps, the Curvance protocol minimizes the risks posed by market volatility and sudden price shifts, aligning with industry risk management principles to ensure the platform’s stability.

• Mitigating Overexposure: Collateral caps prevent overexposure to specific assets within isolated markets, reducing potential adverse impacts during volatile market conditions.

• Ensuring Controlled Borrowing: Collateral caps create an over-collateralized borrowing environment, mitigating systemic risk while providing users with a secure lending and borrowing experience.

Determining Collateral Caps

Collateral caps are set by the Curvance team in coordination with the asset issuer or token partner. When setting a cap, the team reviews the asset’s available liquidity, market depth, trading venues, and expected use within Curvance.

The goal is to support healthy market growth while keeping each cap aligned with the liquidity that could realistically support liquidations and risk management. Caps may be adjusted over time as liquidity conditions, usage, and partner coordination evolve.

Example: If USDY constitutes 80% of a skewed stable pool, with USDC making up 20%, the collateral cap for USDY is calculated based on USDC’s liquidity. If total offside liquidity is $10 million (with $8 million in USDY and $2 million in USDC) and Curvance allows a cap of 40% of offside liquidity, the collateral cap would be 40% of $2 million, or $800,000, translated into tokens based on asset value.

Collateral Cap Example: On-Chain Liquidity Focus

Consider $100 million in sDAI within the Curvance protocol. With a focus on on-chain liquidity, the protocol caps collateralization for sDAI at approximately 10 million tokens. This cap means that no more than 10 million sDAI can be used as collateral, ensuring controlled asset exposure while minimizing systemic risk.

Purpose and Function of Debt Caps

Debt caps limit the total amount of an asset that can be borrowed in a given market. They reduce systemic risk from liquidity crunches, oracle disruptions, and recursive leverage loops by bounding aggregate borrow exposure.

When a market’s total borrowed amount reaches its debt cap, new borrows revert until utilization falls below the cap. Repayments and liquidations remain fully allowed.

Caps are sized to ensure that, under stressed conditions, outstanding debt can be reasonably unwound into on-chain liquidity without causing outsized slippage or prolonged insolvency risk.

Determining Debt Caps

Debt caps are set by the Curvance team in coordination with the asset issuer or token partner. When setting a debt cap, the team reviews borrow demand, available liquidity, asset volatility, market depth, and how easily positions could be unwound during stressed conditions.

The goal is to let markets grow while keeping borrowing limits aligned with realistic liquidity and liquidation capacity. Debt caps may vary across isolated markets for the same asset and can be updated over time as market conditions, usage, and partner coordination evolve.

Debt Cap Example

Behavior at Cap

• New borrows: Revert once the market reaches its debt cap.

• Repayments and liquidations: Always allowed.

• Interest: Continues to accrue as normal; utilization near the cap will still interact with interest rate parameters.

Example:

Suppose WETH has approximately $200M in reliably accessible on-chain liquidity across primary routes. If the DAO targets a 20% maximum borrow exposure for stress-unwind assumptions, the initial debt cap would be $40M equivalent (translated into tokens based on price). New borrows beyond $40M revert until outstanding debt decline.

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Conclusion

By linking collateral and debt caps to market liquidity, asset behavior, and partner coordination, Curvance creates a more controlled approach to collateralized borrowing. This dual-cap system helps protect users and the broader protocol by managing exposure on both sides of the market while still giving users room to scale responsibly.