Summary
This proposal aims to increase the minimal health factor for a new loan for all collateral types within the Liqwid protocol. Increasing the minimal health factor will allow for safe processing of liquidations during market wide volatility events such as 10/10. This proposed change increases the minimum health factor to open new positions from 1.0013 to 1.15 with the goal to stop users from creating positions near liquidation point. At 1.15 health factor a sizeable decrease in collateral value or increase in debt value must occur for a position to get liquidated. This proposal does not impact liquidations which are only possible for loans under 1 health factor.
Current collateral parameters to borrow ADA: Liqwid App
Reasoning
Currently loans for all collateral assets can be opened with a minimal health factor of 1.0013. While this allows maximum capital efficiency for Liqwid borrowers it also enhances the protocol’s surface risk especially during market wide volatility events. Increasing the minimum health factor required increases the margin buffer and reduces the risk of liquidations not being processed during volatility events. For the safety of the protocol it is important liquidators may always profitably repay unhealthy positions during any market condition.
Following the 10/10 market sell off and the speed in which the market crash unfolded the Core Team recognizes the need to increase the minimal health factor such that liquidations remain profitable for as long as possible to secure the protocol and its users. This increased health factor protects the protocol from borrowers creating overly risky debt positions. That risk of positions near liquidation being created during volatile market events is considerably reduced if borrowers are forced to create positions over-collateralized with a minimum 1.15 health factor.
*If this proposal successfully passes any new loan created or modified will have a mandatory minimum health factor of 1.15. It will not be possible to modify a loan under the 1.15 health factor minimum after this proposal is executed.
Proposed Action(s)
- Set the MaxLTV for all assets to 86.96% - decrease from previous values of 99.87% and 99.93%.
This action means the minimum health factor for a new loan becomes 1.15 from a previous 1.0013 HF.
- Close factor 0 and Close factor 1: reduced from from 100% to 50%.
This action means liquidators will only be able to repay 50% of an unhealthy loan per transaction. Currently liquidators are able to repay 100% of unhealthy loans in a single transaction.**
Technical Considerations**
Technical risk for completing these updates are considered low. Liqwid core team will first complete testing on preview.
Conclusion
If successfully passed this proposal will increase the minimum health factor to 1.15 from 1.0013. This change disallows borrowers from opening loans near liquidation during market volatility events which increase the protocol’s risk. This proposal will also decrease the close factors to 50% from 100% so that liquidators will no longer be able to fully repay unhealthy loans in a single transaction. The Liqwid core team supports this proposal.
