Collateral and Debt Caps
Minimizing systemic risk
Collateral and Debt Caps in Curvance
Collateral and debt caps are 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 determined by a third-party risk management group elected by Curvance DAO participants known as the Curvance Collective. These caps are based on an asset’s on-chain liquidity across various pairs within the network. The elected third party also evaluates offside liquidity (liquidity distributed across asset pairs within the protocol) and sets caps to ensure stability.
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, earning native gauge emissions. 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 Collective (a third‑party risk group elected by Curvance DAO), using on-chain liquidity depth, venue fragmentation, expected unwind velocity, asset volatility, and historical liquidity resiliency. Focus on borrow‑side absorbable liquidity across major routes, time‑to-unwind assumptions, and keeper/liquidator capacity. Caps can differ across isolated markets for the same asset, reflecting venue-specific liquidity.
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.
Conclusion
By carefully linking collateral and debt caps to liquidity dynamics and adjusting them via DAO governance, the protocol provides a robust, stable approach to collateralized borrowing. This dual‑cap method aligns user security with broader protocol health, ensuring controlled exposure on both sides of the balance sheet and allowing users to scale responsibly within DeFi.
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