Risk Management
The NELX Lending DeFi Protocol integrates tailored risk parameters to address the unique challenges associated with each asset. These parameters guide the supply and borrowing mechanisms, maintaining the protocol's stability and safeguarding users' interests.
Understanding the risks tied to individual assets is crucial for the Nebeus community. These risks include smart contract vulnerabilities, centralization issues, and market volatility. Each onboarded asset introduces distinct risks, which Nebeus mitigates through advanced tools like supply caps, borrow caps, and isolation modes. These measures enable the safe onboarding of even high-risk assets.
Assets supported by the protocol are added via governance proposals or by administrators authorized by the governance framework.
Key Risk Parameters in NELX Lending
Supply Caps
Supply caps limit the maximum quantity of an asset that can be supplied. This reduces overexposure to volatile assets and protects against exploits such as infinite minting. The cap is determined by the asset’s on-chain liquidity and total collateral volume in the pool.
Formula: "Supply Cap = Liquidity Factor × Collateral Volume"
Borrow Caps
Borrow caps define the maximum amount of an asset that can be borrowed, preventing excessive borrowing and insolvency due to market shocks or price manipulation. The cap is based on the asset’s liquidity and borrowing volume.
Formula: "Borrow Cap = Liquidity Factor × Borrow Volume"
Isolation Mode
This mode limits systemic risk by allowing high-risk assets to serve as collateral exclusively for borrowing isolated stablecoins. Users can use only one isolated asset as collateral at a time.
Siloed Mode
Designed for assets with manipulation-prone oracles, such as illiquid trading pairs, siloed mode restricts borrowers to using siloed assets as collateral for borrowing the same assets. This reduces insolvency risks from cross-asset borrowing.
Efficient Mode (eMode)
Efficient Mode optimizes borrowing for correlated assets like stablecoins. By increasing Loan-to-Value (LTV) ratios, eMode allows users to borrow more efficiently when both collateral and borrowed assets belong to the same category.
Loan-to-Value (LTV) Ratio
The LTV ratio determines the borrowing capacity of a given collateral. For example, an LTV of 75% enables users to borrow up to 75% of their collateral’s value. Adjustments are made based on market conditions to ensure collateralization.
Formula: "LTV = (Borrow Amount / Collateral Value) × 100"
Liquidation Threshold
The liquidation threshold defines the point at which a position becomes undercollateralized. If the collateral value drops below this threshold, the protocol liquidates a portion of the collateral to restore the balance.
Formula: "Liquidation Threshold = Weighted Average (Collateral Value × Threshold Percentages)"
Liquidation Penalty
A fee applied during collateral liquidation incentivizes liquidators to participate and ensures the protocol's solvency.
Formula: "Liquidation Penalty = Collateral Value × Penalty Rate"
Health Factor
The health factor measures the solvency of a user’s position. A health factor below 1 triggers liquidation.
Formula: "Hf = (Sum of Collateral Value × Liquidation Threshold) / Total Borrow Value"
Reserve Factor
A portion of interest earnings is allocated to a reserve fund for risk coverage. Stablecoins typically have lower reserve factors, while volatile assets have higher ones.
Formula: "Reserve Amount = Interest Earnings × Reserve Factor"
Aligning Risks with Risk Parameters
Market risks directly shape parameter settings:
Liquidity: Assets with low liquidity have stricter caps and higher liquidation bonuses to encourage liquidators. Formula:
"Liquidity Adjustment = 1 / Liquidity"Volatility: Highly volatile assets are assigned lower LTV ratios and higher liquidation thresholds to mitigate price fluctuations.
Market Capitalization: Smaller market cap assets face higher incentives to offset liquidation risks.
By aligning risk parameters with asset-specific profiles, Nebeus ensures operational security and solvency. This approach balances capital efficiency with user protection, creating a reliable platform for decentralized borrowing and lending.
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