Borrowing
Collateralized Loans
Vaultka V2 offers users the ability to borrow funds by using their assets as collateral. This feature unlocks liquidity from deposits, providing greater flexibility for reinvestment, leveraging positions, or executing advanced strategies. By introducing dynamic interest rates, adjustable asset and liability weights, and liquidation concepts, Vaultka V2 ensures users have optimal control and risk management for their collateralized positions.
Key Borrowing Parameters
Interest Rates:
Vaultka V2 utilizes a dynamic interest rate model that adjusts based on the pool’s Utilization Rate (UR). When demand for borrowed funds is high, interest rates increase accordingly, ensuring that rates reflect current market conditions.
Collateral and Liability Weights:
To manage risk and provide transparency, Vaultka V2 introduces asset and liability weights for both collateral and borrowed funds. These weights are crucial in calculating the liquidation risk and determining how much users can borrow based on the value of their collateral.
Initial Asset Weight:
This is the initial weight assigned to the collateral at the time of deposit. It determines how much of your collateral is available for borrowing when the position is first opened.
Maintainence Asset Weight:
This weight applies when the collateral is actively used for borrowing or leveraging. It reflects the proportion of collateral that remains available for use, adjusting according to market conditions and changes in the collateral’s value.
Initial Liability Weight:
This is the initial weight assigned to the borrowed funds at the time of the loan. It represents the initial risk associated with the borrowed funds, depending on how much was borrowed relative to the collateral.
Maintainence Liability Weight:
This weight applies to borrowed funds once the loan is active. It changes based on market fluctuations, interest rate changes, and the amount of borrowing, reflecting the current exposure to risk.
Liquidation
Liquidation risk is an essential factor when borrowing funds in Vaultka V2. The system includes a liquidation threshold based on the relationship between the Main Asset Weight and the Main Liability Weight. If the value of the collateral decreases or if the loan amount surpasses a critical threshold, the position will be liquidated to ensure the borrowed funds are covered.
Liquidation Triggering
Liquidation occurs when the ratio of debt to collateral surpasses a critical value. Specifically, the system triggers liquidation when the following condition is met:
In simple terms, liquidation happens when the value of the debt, adjusted for the weight of the liability and asset, exceeds the value of the collateral. This ensures that, in case of falling asset prices or rising debt, the system can liquidate the position to cover the borrowed funds.
Example Calculation
Suppose you have deposited $10,000 worth of SOL as collateral and borrowed $7,000 USDC (70% LTV). The initial collateral and borrowed debt would follow the initial weights for assets and liabilities. If the Maintainence Asset Weight and Maintainence Liability Weight are set such that this formula is triggered, liquidation will occur to protect the system from a default.
Example Procedure for Borrowing and Looping
Deposit Collateral: Start by depositing $10,000 worth of SOL as collateral.
Borrow Funds: Borrow $7,000 USDC (70% LTV).
Amplify Yield: Use the borrowed funds to leverage your position or reinvest in higher-yield strategies.
Looping Strategy: Re-borrow funds against the collateral to compound your position (e.g., applying 5x leverage). However, this will also increase the Loan To Value (LTV), meaning your liquidation risk increases with each additional borrow.
Managing Liquidation Risk
The Maintainence Asset Weight and Maintainence Liability Weight are integral in determining how close a borrowed position is to its liquidation threshold. By actively managing these weights, users can adjust their positions to minimize risk. Vaultka V2 offers tools to monitor real-time asset and liability weights, helping users avoid crossing the liquidation threshold.
Real-Time Monitoring: Vaultka V2 provides real-time data on Asset Weight and Liability Weight, allowing users to monitor their exposure and adjust positions accordingly.
Adjustments: Users can adjust their positions, repay part of their debt, or employ hedging strategies to reduce their liability weight and lower the risk of liquidation.
Conclusion
Vaultka V2’s collateralized loan system, with its dynamic interest rates, asset and liability weights, and detailed liquidation mechanics, allows users to maximize capital efficiency while managing risk. By understanding and actively managing the Main Asset Weight and Main Liability Weight, users can safeguard their positions and minimize the likelihood of liquidation, ensuring a flexible and safe borrowing experience.
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