Risk Management
Pawnfi allows NFT holders to borrow from the Pawnfi $APE Pool when they don't have enough $APE, creating a possibility, albeit extremely unlikely, that staking rewards might not fully cover the $APE loan interest. Our primary objective at Pawnfi is to deliver a risk-free Ape Staking experience and protect users from potential losses during staking. In line with our commitment to user safety, we've outlined two scenarios where a user's NFT staking may be temporarily suspended:
Prior to the commencement of NFT Staking
During the NFT Staking process
Prior to the commencement of NFT Staking
When initiating NFT staking on one of your NFTs, you will not be able to borrow any $APE from the Pawnfi $APE Pool for staking if the following condition is not met:
NFT Stake APY (based on data from Apestake.io) > Borrow Rate (based on data from Pawnfi $APE Pool) + 5%
Nevertheless, you can still proceed with NFT staking if you fully stake using your own $APE, without borrowing from the Pawnfi $APE Pool.
During the NFT Staking process
To ensure that staking rewards adequately cover the $APE loan interest, Pawnfi will continuously track each user's borrowing status, NFT Stake APY, and Borrow Rate in real-time. By doing so, Pawnfi will compute a Health Factor to determine if it is necessary to initiate the repayment process for the $APE loan and suspend a user's NFT staking.
Health Factor
The Health Factor serves as a crucial metric within the system, where higher values signal an increased likelihood of suspending a user's NFT staking. When the Health Factor reaches 100, either Pawnfi Bot or any authorized volunteers can begin the $APE loan repayment process while simultaneously suspending NFT staking. In essence, deposits and unclaimed rewards from specific NFT IDs will be withdrawn to repay the $APE loan. This process will persist until the Health Factor decreases to a value below 50. The formula used to compute the Health Factor is as follows:
BAYC Pool APY, MAYC Pool APY, and BAKC Pool APY are derived from the respective NFT Stake APY data available on Apestake.io. The Health Factor calculation formula incorporates these APY values and is as follows:
Threshold = 1.025
R = [(Σ BAYC Deposit) x BAYC Pool APY + (Σ MAYC Deposit) x MAYC Pool APY + (Σ BAKC Deposit) x BAKC Pool APY]/ (Total Borrow x Borrow Rate x Threshold)
K = e^(2*(1-R))
Health Factor = 100-100*(1 - K)
Please be aware that the $APE loan repayment process does not specifically identify the NFT IDs from which the user borrowed funds (as it is possible to borrow varying amounts when initiating staking for different IDs). This means that even if a user did not borrow any funds while initiating $APE staking for their BAYC #9672, it is still possible that the deposit and unclaimed rewards for BAYC #9672 will be withdrawn to repay an $APE loan, resulting in the suspension of BAYC #9672 staking.
Example
Suppose Alice is currently staking $APE via Pawnfi, and her staking profile looks like this:
Staking 500 $APE with BAYC #9672 in BAYC Pool
BAYC Pool APY: 100%
BAYC Pool unclaimed rewards: 20
Staking 1100 $APE with MAYC #12336 in MAYC Pool
MAYC Pool APY: 58%
MAYC Pool unclaimed rewards: 30
Staking 0 $APE in BAKC Pool
BAKC Pool APY: 130%
Total Borrow: 1500 $APE
Borrow Rate: 53.64%
Alice's Health Factor calculation is as follows:
Threshold: 1.025
R: (500x100% + 1100x58% + 0x130%) / (1500x53.64%x1.025) = 1.38
K: e^(2*(1-1.38)) = 0.468
Health Factor: 100 - 100*(1 - 0.468) = 46.8
However, if the borrow rate suddenly increases to 75%, Alice's Health Factor will rise to 103. This will trigger the $APE loan repayment process and result in the suspension of staking for some NFT IDs. In Alice's case, her deposit and unclaimed rewards in MAYC #12336 will be entirely withdrawn to repay her loan. Her updated staking profile will be:
Staking 500 $APE with BAYC #9672 in BAYC Pool
BAYC Pool APY: 100%
BAYC Pool unclaimed rewards: 20
Staking 0 $APE in MAYC Pool
MAYC Pool APY: 58%
Staking 0 $APE in BAKC Pool
BAKC Pool APY: 130%
Total Borrow: 370 $APE
Borrow Rate: 53.64%
With these changes, her Health Factor drops to 22, and no further repayments will occur. However, Alice's MAYC #12336 is no longer staking (suspended), and she will need to initiate a new staking process with $APE.
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