Risk Parameters

Each asset in Pawnfi has specific values related to their risk, which influences the process of how they are supplied and borrowed. Risk parameters will be routinely reviewed and set up accordingly with varying market condition or DAO governance.

Detailed Risk Parameters Analysis

The risk parameters are used to provide referral criteria for the management of currency risks in Pawnfi protocol. Given the volatility of digital assets, margin would be reserved amid market downturn in each borrowing case. If the value of the collateral slips under a threshold, part of it could be forced into auction to repay the debt, while the rest position would remain collateralized.

Collaterals

In DeFi, assets can be roughly categorized into two types: centralized tokens around single authorities, like USDT, USDC, WBTC, alt coins... etc., and fully decentralized tokens like ETH , AMPL... etc. When deciding a centralized asset to be placed as collateral, Pawnfi will identify whether the underlying asset is vulnerable to the risks in regard with lack of transparency, counterparty risks, and a 'single-point of failure' governance model; as for decentralized token, Pawnfi will look into whether it is highly exposed to risks of stability in decentralized conditions.

That is, when some assets are to be supplied to earn interest in Pawnfi, their risks will be mitigated for not being used as collateral. Therefore, these assets can serve as reliant factor to measure the risks in the protocol.

Collateral Factor

Collateral Factor can also be understood as Loan-to-Value (LTV). It determines the upper limit of amount that can be borrowed against a collateral. A 75% collateral factor means borrowers who have 1 ETH position can borrow a 0.75 ETH worth of corresponding currency. Collateral factor will go along with the market and evolve when Pawnfi Protocol matures.

Liquidation Bonus

Pawnfi places a bonus on liquidations which goes to liquidators to keep the system solvent. In a borrower's default case, the collateral will be sold at a discount to liquidators for paying back a loan subject to liquidation process. Currently in Pawnfi, the discount is 8% for every token. However, liquidation bonus might have different setup for specific token due to market condition change or DAO governance.

See Liquidation for more details on how Pawnfi rewards liquidators.

Reserve Factor

The reserve factor is the protocol's deposit to safeguard its overall sustainability. It mainly derives from borrowers' paid interests, and can be used as incentives for protocol governance and risk premium to protect all suppliers. Volatility is the clincher to decide reserve factors: the more volatile the assets, the higher the reserve factor.

Reserve factors will stimulate the growth of borrowing demand, which will increase the protocol's reserves, and supply market liquidity. The reserve factor won’t make immediate difference to the whole protocol if compared with making changes to collateral factor, etc., hence a multivariate system will form to further mitigate market risks.

Latest Risk Parameter Setup

The table below shows a summary of the latest values.

Name	Symbol	Collateral	Collateral Factor	Liquidation Bonus	Protocol Seize Share	Reserve Factor
Mainstream Coins
Tether USD	USDT	Yes	82%	8%	2.8%	7.5%
USD Coin	USDC	Yes	85%	8%	2.8%	7.5%
DAI	DAI	Yes	83%	8%	2.8%	15%
Ethereum	ETH	Yes	82%	8%	2.8%	20%
Wrapped BTC	WBTC	Yes	70%	8%	2.8%	20%
Lido Staked Ethereum	stETH	Yes	75%	8%	2.8%	20%
Staked Ape Coin	sAPE	Yes	60%	8%	2.8%	N/A
P-Token
Bored Ape Yacht Club	P-BAYC	Yes	70%	8%	2.8%	20%
Mutant Ape Yacht Club	P-MAYC	Yes	70%	8%	2.8%	20%
Bored Ape Kennel Club	P-BAKC	Yes	60%	8%	2.8%	20%
Azuki	P-AZUKI	Yes	65%	8%	2.8%	20%

The table above projects the asset risk assessment subject to security, governance and the markets. Tokens with security concerns around their smart contract won't be accepted by Pawnfi protocol since these risks are unlikely to control. Similarly, tokens with high risk exposure to single counter-parties cannot be supplied as collateral.