ALEX and the End of Liquidation Risk
A review of how our dynamic CRP brings seat belts and airbags to #DeFi
(thread)👇👇👇
#Crypto #Bitcoin @Stacks @StacksOrg
A review of how our dynamic CRP brings seat belts and airbags to #DeFi
(thread)👇👇👇
#Crypto #Bitcoin @Stacks @StacksOrg
First, what is Liquidation Risk in #DeFi?
When the value of your collateral drops and causes your LTV to rise above the max protocol limit, you are liquidated. Your collateral is sold,you lock in losses and you're charged hefty liquidation fees.
When the value of your collateral drops and causes your LTV to rise above the max protocol limit, you are liquidated. Your collateral is sold,you lock in losses and you're charged hefty liquidation fees.
Why worry about Liquidation Risk?
Because BTC is highly volatile!
As of Oct 1, 2021 the volatility of #Bitcoin is ~80% annualized, for comparison the volatility of the SP500 is ~13% annualized.
There is significant chance with BTC an outlier event will cause forced liquidation
Because BTC is highly volatile!
As of Oct 1, 2021 the volatility of #Bitcoin is ~80% annualized, for comparison the volatility of the SP500 is ~13% annualized.
There is significant chance with BTC an outlier event will cause forced liquidation
Lending and borrowing are the foundation of all higher finance. These should be basic and boring transactions.
In #crypto, without active collateral rebalancing, these remain risky transactions. This risk and fear prevents mass adoption and limits the potential of #DeFi.
In #crypto, without active collateral rebalancing, these remain risky transactions. This risk and fear prevents mass adoption and limits the potential of #DeFi.
Example: March 12, 2020 "Black Thursday" for #DeFi, tens of millions worth of collateral liquidated across multiple platforms.
#DeFi with Liquidation Risk is like driving a car without a seat belt or airbags....
If prices plunge suddenly, your collateral is wrecked.
If prices plunge suddenly, your collateral is wrecked.
How does ALEX eliminate Liquidation risk?
We are a protocol built by Quants who have built the quantitative trading and risk management systems for Wall St. and major institutions.
We've taken that knowledge, experience and skill in creating robust financial instruments to DeFi
We are a protocol built by Quants who have built the quantitative trading and risk management systems for Wall St. and major institutions.
We've taken that knowledge, experience and skill in creating robust financial instruments to DeFi
Usually collateral is held in a single asset pool. Your collateral is #Bitcoin, and the pool value is Bitcoin's value.
We've created a collateral pool with both risky (BTC) and riskless assets (USDC), governed by a rebalancing equation that actively responds to the market.
We've created a collateral pool with both risky (BTC) and riskless assets (USDC), governed by a rebalancing equation that actively responds to the market.
Using the “Black Thursday” historical data, this is the performance of the Dynamic CRP.
If the collateral pool value drops below a pre-determined threshold, ALEX converts the entire balance of risky assets to riskless asset.
If the collateral pool value drops below a pre-determined threshold, ALEX converts the entire balance of risky assets to riskless asset.
This ensures that borrowers can always cover the loan's initial value.
It also ensures no interruption of borrowing / lending activity more broadly.
No liquidation occurs so there are no +8% liquidation penalties.
It also ensures no interruption of borrowing / lending activity more broadly.
No liquidation occurs so there are no +8% liquidation penalties.
To draw from another example from history, this is how ALEX's dynamic CRP would have protected your collateral from liquidation in late 2017.
Converting the entire balance of risky assets to riskless asset is the seat belt and airbag deploying to protect your collateral.
ALEX’s algorithmic engine and diversified pools minimize the risk of a borrower defaulting.
The result is a smoother lending/borrowing experience.
Parties have more peace of mind, are interrupted less frequently, and achieve robust returns even in volatile market conditions.
The result is a smoother lending/borrowing experience.
Parties have more peace of mind, are interrupted less frequently, and achieve robust returns even in volatile market conditions.
This is important because, lending and borrowing are the brick and mortar of finance. If we can master these two transactions, we can reconstruct all of higher finance in DeFi space.
And #DeFi provides the financial infrastructure that’s needed to realize #Web3.
And #DeFi provides the financial infrastructure that’s needed to realize #Web3.
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