# Risk Management
Avalon’s CeDeFi lending and CDP systems share a robust risk management infrastructure designed to protect both users and the platform. The following risk parameters are essential for managing the risk associated with collateralized borrowing.
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## **Risk Parameters**
#### 1. LTV (Loan-to-Value)
The LTV ratio represents the proportion of the borrowed stablecoin value to the collateral’s value. It determines how much stablecoin a user can borrow based on the value of their collateral.
#### 2. Max LTV (Maximum Loan-to-Value)
The maximum allowable LTV ratio when borrowing USDT. This sets an upper limit on the amount of stablecoin a user can borrow relative to the value of their collateral.
#### 3. Liquidation Threshold
This is the LTV ratio at which collateral becomes eligible for liquidation. If a user’s LTV surpasses this threshold, a portion of the collateral may be liquidated to bring the LTV back to a safer level.
#### 4. Recovery LTV
The target LTV ratio that liquidation seeks to restore. If collateral is liquidated, the goal is to reduce the LTV to this predetermined level.
#### 5. Subject to Liquidation
This parameter indicates whether a collateral type is subject to liquidation. Typically, volatile assets like BTC and ETH are subject to liquidation to ensure USDa’s backing. In contrast, stablecoins like USDT and USDC are usually exempt from liquidation.
These parameters collectively manage the risk associated with borrowing against collateral in the CeDeFi lending system, ensuring that users can borrow responsibly while protecting the platform against potential losses from fluctuating collateral values.
#### Risk Parameters for Supported Collaterals:
| Assets | Max LTV | Liquidation Threshold | Recovery LTV | Subject to Liquidation |
|---|
| FBTC | 60% | 90% | 80% | Yes |
| USDC | 100% | - | - | No |
| USDT | 100% | - | - | No |
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## **Liquidation Process**
Liquidation occurs only for assets that are subject to liquidation, as defined above. If a user’s collateral exceeds the liquidation threshold, the following steps take place:
#### **1. Account Restrictions**
Users will not be able to withdraw collateral until the liquidation process is completed.
#### **2. Collateral Liquidation**
Collateral will be sold on centralized exchanges, with careful management to minimize market impact. The goal is to reduce the user’s LTV to the Recovery LTV level defined by Avalon.
#### 3. Account Updates
After liquidation, the user’s collateral and loan amounts will be adjusted according to the outcome of the liquidation process.
This structured process ensures that the platform can effectively handle high-risk situations and protect both users and the platform by bringing LTV ratios back to safe levels.
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## **Liquidation Algorithm**
Avalon’s liquidation algorithm is designed to execute liquidations efficiently and with minimal market disruption. Key components of the algorithm include:
#### 1. High-Frequency Data Module:
This module continuously receives updates from centralized exchanges to track the price of collateral in real time.
#### 2. Prediction System:
This system predicts the optimal timing and aggressiveness for liquidation orders based on current market conditions.
#### 3. Order Book Quoting Logic:
The algorithm places limit orders strategically across multiple levels of the order book to reduce price impact and minimize the risk of information leakage.
#### 4. Risk Monitoring System:
This system monitors the entire liquidation process to ensure that all operations stay within predefined risk thresholds and parameters.
Together, these components ensure that liquidations are handled in the most efficient way possible, protecting both the platform and users from excessive volatility.
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## **Custody Solutions**
Avalon works with industry-leading custody solution providers, including **Cobo, Fireblocks**, and **Coinbase Prime**, to ensure the security of protocol assets. All custody addresses are publicly available for user review, providing transparency and peace of mind.
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## **Oracle Solutions**
Avalon uses the industry-standard decentralized oracle Redstone as its primary oracle for the BTC-USD market securing our BTC-backed stablecoin, USDa, across all supported networks.
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