Collateral Caps

Collateral caps within Curvance serve as specific restrictions for users engaging in the money market to protect the platform from bad debt and manipulation. While Curvance allows an infinite amount of assets to be supplied and earn yield, only a portion can be posted as collateral and utilized for borrowing within the money market segment.

Implementing collateral caps within Curvance is fundamental to maintaining the platform's stability and mitigating systemic risks. These caps serve as a protective measure against potential market volatility and sudden asset movements. By restricting the amount of an asset that can be utilized as collateral within the isolated market, Curvance ensures a prudent borrowing mechanism that minimizes the impact of adverse market conditions. This carefully controlled over-collateralization prevents overexposure to specific assets and aligns with risk management principles, safeguarding the protocol's overall health while facilitating a secure user borrowing and lending environment.

The collateral cap of an asset is determined by assessing its off-chain liquidity within the network, focusing on the liquidity distribution across different asset pairs. The DAO will maintain and determine this by electing a third party. Offside liquidity refers to the distribution over different asset pairs, specifically within the protocol, focusing on the proportion of assets held in paired pools or other off-chain liquidity sources.

Example: Consider a scenario where a significant liquidity concentration exists in a skewed stable pool, with an asset representing 80% of the collateral asset (let's say USDY) and 20% of the offside asset (e.g., USDC). The collateral cap for USDY is then calculated based on the offside liquidity of USDC, reflecting the proportion that the offside asset contributes to maintaining stability within the protocol.

To illustrate further, if there's $10 million in total offside liquidity, with $8 million in USDY and $2 million in USDC, and the protocol allows users to collateralize 40% of offside liquidity, the collateral cap would be derived from 40% of $2 million USDC, equating to $800,000. This figure is then translated into tokens based on the asset's value.

These collateral caps are subject to updates by the Curvance DAO, which evaluates and adjusts the caps according to changes in offside liquidity dynamics. The DAO determines the appropriate cadence for these updates, ensuring alignment with on-chain liquidity and minimizing systemic risks within the isolated lending markets.

By linking collateral caps to offside liquidity and providing a mechanism for DAO-controlled adjustments, Curvance establishes a prudent approach to borrowing against collateral while maintaining platform stability.

Collateral caps are a vital safeguard to mitigate market risks, leveraging on-chain liquidity as their foundation. For instance, consider $100 million in cvxCRV within Curvance, actively deployed to Convex and perpetually compounded while simultaneously receiving Curvance gauge emissions. However, it's crucial to note that Curvance's collateralization strategy emphasizes on-chain liquidity, and in this case, it would currently be capping collateralization at around 2 million tokens of cvxCRV.

Thus no more than a maximum of 2 million cvxCRV can be utilized as collateral for borrowing stablecoins without triggering asset movement. This meticulous approach facilitates borrowing against the collateral and effectively minimizes systemic risks. By carefully controlling the collateral cap in line with on-chain liquidity, Curvance ensures stability without disrupting asset dynamics.

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