Key Parameters
AxiomLend has a number of core parameters that allow mitigating market risks of the currencies supported by the protocol. Each loan is guaranteed by collateral that may be subject to volatility. Sufficient margin and incentives are needed for the loan to remain collateralized in adverse market conditions. If the value of the collateral falls below a threshold, a liquidation event occurs where part of it is auctioned to repay part of the loan and keep the ongoing loan collateralized.
Borrowable Assets
Collateral-Only Assets
Market risks can be mitigated through AxiomLend’s core parameters which define collateralization and liquidation rules. These parameters are calibrated per currency to account for the specific risks.
Overall, stablecoins are mostly used for borrowing, while volatile assets which users are long on are mostly used as collateral. Hence, the users of the protocol still gain great benefits from the addition of these stablecoins. Their risks are mitigated by the fact they cannot be used as collateral.
Utilization Rate
The percentage of a supplied asset that is currently borrowed. If there is 10k ETH supplied, and 7.5k ETH borrowed, then the utilization rate is 75%.
AXIOM Incentive per Day
The amount of daily AXIOM liquidity incentives paid to both lenders and borrowers of each rToken. 50% of the amount will go to lenders and borrowers each (equal split).
Collaterals and Collateral Factors
The Collateral Ratio is expressed in percentage: at CF=65%, for every 1 ETH worth of collateral, borrowers will be able to borrow 0.65 ETH worth of the corresponding currency.
Collateral Factor is effectively the liquidation threshold. If the value of the borrowed assets of an account exceeds the collateral factor of the lent assets, then the position is at risk of liquidation.
High price volatility of an asset can negatively affect collateral, threatening solvency of the AxiomLend protocol. The collateral must cover loan liabilities in order to remain solvent. The risk of the collateral falling below the loan amounts can be mitigated through the level of coverage required, otherwise known as the Collateral Factor. It also affects the liquidation process as the margin for liquidators needs to allow for profit.
The least-volatile currencies are stablecoins and thus they have the highest Collateral Factor. They are followed by Proven-chip tokens such as ETH with Collateral Factors in the range 50-65%. The most volatile currencies have the lowest Collateral Factor (50% or less) to protect our users from a sharp drop in price which could lead to undercollaterisation followed by liquidation.
Reserve Factor
The reserve factor is the parameter that controls how much of the interest for a given asset is routed to that asset's Reserve Pool. It allocates a share of the protocol's interests to a collector contract as a reserve for the ecosystem. The purpose of this contract is to sustain the AxiomLend reserve pool.
Axiom Finance’s solvency risk is covered by its Reserve Factor, with the incentives coming from the ecosystem reserve. As such, the Reserve Factor is also a risk premium and so it is calibrated based on the overall risk of the asset. Stablecoins are the less risky assets with lower reserve factor while volatile assets hold more risk with a higher factor.
Liquidation Incentive
A user who has negative account liquidity is subject to liquidation by other users of the protocol to return his/her account liquidity back to positive (i.e. above the collateral requirement). When a liquidation occurs, a liquidator may repay some or all of an outstanding borrow on behalf of a borrower and in return receive a discounted amount of collateral held by the borrower; this discount is defined as the liquidation incentive.
Base Rate per Year
The minimum APY% when the utilization rate is zero.
Multiplier
The rate of increase in interest rate with regards to utilization rate, as long as the utilization rate is less than or equal to the Kink.
Kink
Liquidity risk occurs when utilization rates get too high. To combat this, the interest-rate curve can be split in two parts around an optimal utilization rate. The point that splits this curve is called the Kink.
Worded differently, the Kink is the optimal borrow rate, after which interest rates will rise sharply.
When the utilization rate (borrow rate) is less than or equal to the Kink, interest rates are low to encourage loans. Rates increase slowly with increased utilization (borrowing)
When the utilization rate is above the Kink, interest rates are high to encourage repayments of loans and additional deposits. Rates rise quickly with increased utilization.
Jump Multiplier
The rate of increase in interest rate with regards to utilization rate, once the ultilization rate is greater than the Kink.
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