Risk Factors


Kinza Finance adopts a policy of over collateralization – which means that collateral values must be greater than the loan. Each lending market will require a unique risk-associated requirement for overcollateralizing. Some factors that affect the risk determination of each asset include:

  • Volatility - Highly volatile assets require a higher LTV, as the value of a loan or collateral changes in higher frequency and degree compared to other assets – and therefore possess an increased risk of triggering liquidations.

  • Market Capitalization – Small market capitalization projects are newer, with more unknowns regarding the security and stability of project assets. Furthermore, projects with small market cap valuations tend to be substantially more volatile than large market cap counterparts. Market capitalization requires its own consideration, separate from the volatility implications.

The risk assessment of each asset determines the parameters for lenders and borrowers. Loan to Value, and Liquidation Thresholds are used to monitor and maintain healthy overcollateralized loans.

Loan to Value

Loan to Value refers to the ratio of loan in relation to the value of collateral. LTV is used to ensure platform stability and protect against price-action volatility, which can damage the health of user accounts.

Riskier assets experience higher volatility and require a larger buffer in collateral value to maintain a healthy account and prevent a domino effect of liquidations. Both collateral and borrow asset risk assessments affect the unique LTV in a given circumstance.

Example: Linda deposits BNB. In this instance, Linda wants to borrow BUSD. If the LTV in the BNB lending market is 60%, Linda can borrow 0.6 BUSD for every 1 BUSD worth of BNB deposited as collateral. Linda cannot borrow more than 60% of the total value of her collateralized assets.

Liquidation Threshold

Liquidation Threshold is the threshold ratio of loan vs collateral value, which regulates whether a borrower is in good standing with a healthy account, and overcollateralized loan. If the threshold ratio is crossed, a borrower is designated as holding an undercollateralized loan and potentially subject to liquidation. Liquidation allows anyone to purchase a portion of the loan (at a discount) to bring the health of the borrow account back above the liquidation threshold. A liquidation threshold can be hit if a collateral asset falls in value, or a borrowed asset appreciates in value.

Liquidation Threshold of a user's account is calculated as the weighted average of the Liquidation Thresholds of all collateral assets in the account:

LiquidationThreshold=Σ Collaterali in USD  LiquidationThresholdiTotalCollateral in USDLiquidationThreshold = \frac{ \Sigma \ Collateral_i\ in\ USD\ *\ LiquidationThreshold_i}{TotalCollateral\ in\ USD}

Example: For the following example, let’s assume a liquidation threshold of 65%. Linda has borrowed the maximum amount of BUSD for her collateralized BNB. Due to market price-action, BNB has dropped in price to the point where she is then borrowing the equivalent of 0.65 BUSD for every 1 BUSD worth of BNB in collateral. This has now reached the liquidation threshold, and Linda’s account could be marked for liquidation.

Health Factor

The Health Factor is a number given to represent the health of an account, with all positions, deposits, and loans considered. Each wallet must maintain a health factor of >1. If the health factor of an account drops below 1, loan positions may be liquidated to return a wallet account back to health.

Health Factor is calculated in the following way:

HealthFactor=Σ Collaterali in USD  LiquidationThresholdiTotalBorrows in USDHealthFactor = \frac{ \Sigma \ Collateral_i\ in\ USD\ *\ LiquidationThreshold_i}{TotalBorrows\ in\ USD}

Example: Linda supplied $100 USDC (Liquidation Threshold is 85%) and $100 worth of BNB (Liquidation Threshold is 75%), and then borrowed $150 worth of ETH.

At this time, Health Factor=((100*85%)+(100*75%))/150=1.06. If the prices of collateral(USDC /BNB) decreases, or price of debt(ETH) increases, the Health Factor will decrease and has a risk of moving lower than 1. If it drops below 1, the position will be liquidated.

  1. Increase in debt value: If the ETH loan originally worth $150 increases in value to $161, calculated according to the above formula, the Health Factor is 0.993, which is lower than 1, triggering liquidation.

  2. Collateral value decreases: If the $100 worth of BNB drops to $88 in value, the Health Factor will become 0.999, and it will also trigger liquidation.

Supply and Borrow Caps

These parameters limit how much an asset can be supplied or borrowed. Limiting supply can help reduce exposure to an asset and prevent attacks like infinite mining or price manipulation. Limiting borrow can help reducing insolvency risk.

Last updated