Understanding collateral credit & borrowing credit

Collateral Credit & Borrowing Credit

Alpha Homora v2 uses the concept of collateral credit and borrowing credit to determine how much leverage a user can get given which asset(s) is supplied and which asset(s) is borrowed to yield farm. With this mechanism, Alpha Homora v2 can set leverage and buffer parameters according to the volatility of each asset to ensure maximum capital efficiency and security of the protocol.
Note that collateral credits and borrowing credits are different from collateral ratio or loan-to-value ratio implemented in other protocols.

What is a collateral credit?

A collateral credit determines how much credit is gained from collateralizing an asset. The more volatile an asset, the lower the collateral credit. For instance, $1 of ETH gets 0.8 credit while $1 of SUSHI gets 0.67.

What is a borrowing credit?

A borrowing credit determines how much credit is consumed from borrowing an asset. The more volatile an asset, the higher the borrowing credit. For instance, borrowing $1 of ETH would consume 1.3 credit while borrowing $1 of SUSHI would consume 1.5.

Example Scenario

So how would this work in reality?
Bob supplies ETH to borrow DAI in Uniswap's ETH-DAI pool
Given the analysis that we have done, $1 of ETH will get 0.80 collateral credit. $1 of DAI will get 0.95 collateral credit. To borrow $1 of DAI, DAI would consume 1.05 credit, which represents DAI’s borrowing credit.
If Bob supplies $100 of ETH in the first step of Uniswap’s ETH-DAI pool
→ he would get ~80 credit.
→ Bob wants to borrow $600 worth of DAI, which will consume 630 credit (600*1.05).
→ At the same time, this $600 worth of DAI also adds 570 collateral credit (600*0.95) because...
→ ...the borrowed DAI contributes to the LP token of Bob's position, and the actual collateral on Alpha Homora V2 platform is the LP token itself.
→ Thus, Bob can achieve 7.0x leverage while staying solvent on the protocol level (total collateral credit of 650 vs. total borrow credit of 630).
Since collateral credit and borrow credit are distinct for each asset, the above scenario will change if Bob were to supply ETH and borrow a different token that is not DAI.
Last modified 6mo ago
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