🔐Risk Parameters

Joule Finance employs various risk parameters to manage the risks associated with lending and borrowing activities. These parameters are carefully designed to maintain the solvency of the protocol, incentivize responsible borrowing and lending behavior, and ensure the long-term sustainability of the system. Let’s examine each parameter and its impact on the protocol’s risk management:

1. Collateral Factor (LTV)

The collateral factor, denoted by collateral factor, represents the maximum loan-to-value (LTV) ratio allowed for borrowing assets. It defines the percentage of a deposited asset that a user can borrow against. For example, if the collateral factor for ETH is 80%, a user supplying 1 ETH worth $2000 can borrow up to $1600 (1 ETH * $2000 * 80%) worth of other assets.

Maximum Loan Amount = collateral factor × Deposited Asset Value

2. Liquidation Factor

The liquidation factor is the percentage at which a borrower’s position becomes eligible for liquidation. If the value of a borrower’s collateral falls below the liquidation threshold, their position can be liquidated by keepers to bring it back to a safe collateralization level. This acts as a safety measure to prevent potential defaults and maintain solvency within the protocol.

3. Repay Factor

It can be defined as the percentage of repayment that can be done against liquidation. It specifies the minimum percentage of a liquidated position that must be repaid to avoid liquidation. This can offer some flexibility to users facing liquidation by allowing them to regain control of a portion of their collateral by repaying a minimum amount.

4. Liquidation Bonus

The liquidation bonus is a key parameter that incentivizes users to participate in the liquidation process and helps maintain the solvency of the lending protocol. When a bor- rower’s position becomes undercollateralized and eligible for liquidation, the liquidation bonus provides an additional reward to liquidators on top of the discounted collateral they receive.

5. Max Lend

The max lend parameter sets a cap on the total amount of a specific asset that can be deposited into the lending pool. This can be used to manage risk by limiting exposure to a single asset class. By setting appropriate max-lend limits for each asset, the protocol can diversify its holdings and mitigate the concentration risk associated with over-reliance on a particular asset.

6. Max Borrow

The borrow cap limits the total amount of an asset that can be borrowed from the pro- tocol. This parameter helps manage the risk exposure to individual assets by preventing excessive borrowing of a particular asset. Setting appropriate max borrow limits ensures that the protocol’s risk is not overly concentrated in a single asset class.

7. Efficiency Mode

Efficiency mode is a protocol feature that allows for the implementation of advanced risk management strategies that leverage relationships between different assets. It enables users to borrow a higher percentage of an asset’s value (increased LTV) if it’s paired with another less volatile asset as collateral, such as USDT/USDC.

8. Interest Rate Curve

The interest rate curve defines the relationship between asset utilization and borrowing rates. It consists of several parameters:

• Base borrow rate: This is the base interest rate charged for borrowing assets.

• Borrow multiplier: This multiplier is applied to the base rate to determine the

  actual borrowing rate.

• Jump multiplier: This multiplier is applied to the base rate when asset utilization reaches the jump utilization threshold.

• Jump utilization: This threshold utilization level triggers the application of the jump multiplier.