Risk Sensitive Parameters
In order to ensure that the protocol issues high-quality loans, there are a number of risk-sensitive parameters that can be tuned to trade-off security for capital efficiency. Those limits are similar to risk limits and stress test parameters used in traditional banking systems.
Minimum Collateral Ratio (MCR) - represents the amount of over-collateralization required for users to borrow EURO3. It is calculated as the ratio between the value of the collateral (number of tokens * token price) divided by the EURO3 debt. The EURO3 is always valued at 1 EURO for this calculation. The MCR is set on a per-asset basis and adjusted when market conditions change dramatically.
Minimum Liquidation Ratio (MLR) - represents the collateral ratio that leads to a loan being automatically liquidated. By providing a buffer between MCR and MLR, the 3A protocol can balance between a more aggressive liquidation policy for volatile assets and a capital-efficient policy for more stable assets.
Users can borrow up to the MCR, while the Vaults will be automatically liquidated if the collateral ratio falls below the MLR.
Health Factor estimates the safety of the user’s collateral assets against the borrowed assets and their underlying value.
If the Health Factor falls below 1 then the Vault gets liquidated
If the Health Factor is > minHF then the Vault cannot be redeemed against. minHF is algorithmically determined by the protocol as a function of EURO3 price
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