Risk Management
Risk management infrastructure is shared by both CeDeFi lending and CDP.
Risk Parameters:
Here are the definitions of the risk parameters:
LTV (Loan-to-Value): LTV is the ratio of the borrowed stablecoin value to the collateral value. It indicates how much stablecoin a user can borrow based on the value of their deposited collateral.
Max LTV (Maximum Loan-to-Value): This is the highest LTV ratio that users are allowed to reach when borrowing USDT. It sets the upper limit on how much stablecoin can be borrowed relative to the collateral's value.
Liquidation Threshold: The Liquidation Threshold is the LTV ratio at which the collateral becomes eligible for liquidation. If a user's LTV exceeds this threshold, a portion of their collateral may be liquidated to reduce the LTV back to a safer level.
Recovery LTV: The Recovery LTV is the target LTV level that the liquidation process aims to achieve. When collateral is liquidated due to exceeding the Liquidation Threshold, the goal is to bring the LTV down to this predetermined Recovery LTV level.
Subject to Liquidation: This indicates whether the collateral is subject to a liquidation process. In most of the cases, volatile assets like BTC and ETH will be subject to liquidation. These collateral will be sold to make sure the backing of USDa. In most of the cases, stablecoins like USDT and USDC are NOT subject to 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.
The 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 |
Liquidation Process:
Liquidation only applies to collaterals which are subject to liquidation based on the above table. During a liquidation event, the following steps occur:
Account Restrictions: Users will be unable to withdraw any collateral until the liquidation process is complete.
Collateral Liquidation: Users' collateral will be sold on centralized exchanges with careful management to minimize any impact on market prices. The liquidation process aims to reduce the user's Loan-to-Value (LTV) ratio to the Recovery LTV level predetermined by the platform.
Updating Accounts: Following liquidation, adjustments will be made to the user's collateral amount and the stablecoin loan amount based on the outcome of the liquidation process.
This process ensures that in the event of a high-risk situation where the LTV threshold is exceeded, the platform can efficiently mitigate potential losses while maintaining fairness and transparency for users involved in the borrowing and lending activities.
Liquidation Algorithm:
The liquidation algorithm employed by Avalon comprises several components:
High-Frequency Data Module: This module receives order book updates from centralized exchanges for collaterals at a high frequency.
Prediction System: This system determines the optimal timing and aggressiveness for executing orders based on market conditions.
Order Book Quoting Logic: The algorithm utilizes a logic that strategically places limit orders across multiple levels of the order book. This approach aims to minimize both price impact and the risk of information leakage during the liquidation process.
Risk Monitoring System: A comprehensive system monitors the overall execution process to ensure adherence to predefined risk thresholds and operational parameters.
This algorithmic framework enhances the efficiency and effectiveness of liquidations within Avalon's CeDeFi lending platform, prioritizing market stability and user asset protection during critical events.
Custody Solutions:
Avalon partners with top-tier custody solution providers including Cobo, Fireblock and Coinbase Prime to safeguard protocol assets. All custody addresses are public for users to review.
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