In extreme market conditions, some volatile assets may lead borrowing positions to become insolvent, with no collateral left. Any liabilities or borrowed assets will now be considered bad debt. This can have ripple effects on the platform.

To protect each lending pool from bad-debt, Kinza Finance uses a reserves mechanism, whereby borrowers pay a portion of interest to a reserve pool that can be used as a last resort. To ensure that each pool has enough funds in reserves, Kinza determines a pool-specific Reserve Factor.

Reserve Factor

The Reserve Factor is a number given to each lending market that sets the proportion of interest diverted to reserves for that specific market. Given each market involves assets with varying levels of risk and volatility, it is necessary to divert more or less interest to reserves to ensure that reserve funds accumulate faster than bad-debt in each case. A careful balance must be reached to properly incentivize lenders, but also to maximize the security and stability of the lending market.

Kinza Finance will allow the Reserve Factors to evolve according to Governance processes to achieve a healthy balance in each lending market.

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