Risk Parameters

Introduction

Each asset within the Rhombus Protocol is assigned specific risk parameters that dictate how they can be supplied and borrowed within the protocol. The Rhombus introduces advanced risk mitigation tools, enhancing security, governance, and market-related parameters. It is essential for the Rhombus community to understand the risks associated with each asset to ensure the protocol remains secure and resilient.

All assets supported by the Rhombus Protocol are added via Governance Proposals or through Asset Listing Administrators appointed by the Rhombus Governance.

Risk Parameters Overview

Risk parameters mitigate market risks for assets supported by the Rhombus Protocol. Each borrowing transaction is over-collateralized with assets that may be subject to volatility. Adequate margins and incentives are required to keep positions collateralized during adverse market conditions. If the value of collateral falls below a set threshold, a portion may be liquidated with a Liquidation Bonus to repay part of the debt and maintain collateralization.

Key Risk Parameters in V3

Rhombus Protocol V3 introduces several new risk parameters to provide enhanced protection against insolvency:

1. Supply Caps

• Definition: Limits the maximum amount of an asset that can be supplied to the protocol.

• Purpose: Restricts exposure to riskier assets and guards against infinite minting exploits.

• Implementation: The value of the supply cap is determined by the on-chain liquidity of the asset and the total collateral volume in the pool.

2. Borrow Caps

• Definition: Sets the maximum amount of an asset that can be borrowed.

• Purpose: Prevents excessive borrowing of an asset that could be subject to price exploits and protocol insolvency.

• Implementation: The borrow cap is set based on the on-chain liquidity of the asset and the total volume of borrowed assets in the pool.

3. Isolation Mode

• Definition: Limits systemic risk by restricting riskier assets to borrowing isolated stablecoins and using a single isolated asset as collateral.

• Implementation: For more details, refer to the Isolation Mode Documentation.

4. Silo Mode

• Definition: Applies to new assets with potentially manipulatable oracles. Siloed assets restrict borrowers to single-borrow positions, minimizing protocol insolvency risk.

• Implementation: A borrower of a siloed asset cannot borrow any other asset simultaneously.

5. High Efficiency Mode (e-Mode)

• Definition: Allows assets with correlated prices (e.g., stablecoins) to be listed in the same e-Mode category, maximizing capital efficiency by enabling higher Loan-to-Value (LTV) ratios.

• Current Implementation: Only one e-Mode category is active—KAIA LST (category 1).

Additional Risk Parameters

Loan to Value (LTV)

• Definition: Represents the maximum amount of assets that can be borrowed against a specific collateral, expressed as a percentage.

• Example: At an LTV of 75%, for every 1 ETH worth of collateral, users can borrow up to 0.75 ETH worth of assets.

Liquidation Threshold

• Definition: The percentage at which a position becomes under-collateralized, triggering a liquidation.

• Example: A liquidation threshold of 80% means the position can be liquidated if its value exceeds 80% of the collateral.

Liquidation Penalty

• Definition: A fee applied to the collateral price when liquidators purchase it as part of liquidating a loan that has exceeded the liquidation threshold.

Liquidation Factor

• Definition: Allocates a portion of the liquidation penalty to the ecosystem treasury.

Health Factor

• Definition: Represents the overall risk of a borrower's position. A Health Factor below 1 indicates that a position is at risk of liquidation.

• Calculation:

$$\text{Health Factor} = \frac{\sum (\text{Collateral}_i \times \text{Liquidation Threshold}_i)}{\text{Total Borrows in ETH}}$$

Reserve Factor

• Definition: Allocates a portion of the protocol’s interest to a collector contract from the ecosystem treasury.

• Purpose: Serves as a risk premium calibrated based on the asset’s overall risk.

Mitigating Market Risks

Market risks have a direct impact on risk parameters and the protocol's stability. These risks include:

Liquidity

• Importance: Adequate liquidity is crucial for the liquidation process. Caps and liquidation parameters mitigate low-liquidity risks by providing higher incentives for liquidation.

Volatility

• Impact: Price volatility affects collateral value and can lead to under-collateralization. High volatility necessitates stringent LTV and liquidation parameters.

Market Capitalization

• Importance: Represents the size of the asset market, influencing the liquidation process. Smaller market caps are typically more volatile and pose higher liquidation risks.

Overall Risk

The overall risk rating is used to calibrate the Reserve Factor, with less risky assets assigned a lower factor (e.g., 10%) and riskier assets a higher factor (up to 35%).

Conclusion

Effective risk management is crucial to maintaining the solvency and stability of Rhombus Protocol. The community must remain vigilant in monitoring and adjusting risk parameters as needed to protect the protocol and its users.