Lower margin requirements without sacrificing security of the liquidity providers

Lower margin requirements without sacrificing security of the liquidity providers

To track position health, Alf tracks a so-called lockbox collateral factor for each lock-
box instance. The CF is a factor by which collateral value is discounted when comparing it to borrow value. By default, the collateral factor is set to 1.5, which enables up to 3x
leverage for any lockbox type:

OF+D/D = 1.5 → D = 2 · OF,

where OF is user’s own funds and D is debt.

However, the community can vastly reduce the collateral factor (therefore, increasing
maximal leverage) for a lockbox type by adding a collateral factor oracle. A collateral
factor oracle is a special lockbox add-on that takes lockbox contents as input and outputs
the current recommended collateral factor.

Collateral factors can have many behaviors, depending on a particular oracle chosen
by a community. A few examples:

• Constant collateral factor applied to all lockboxes of a particular type;

• A weighted-mean CF from individual CFs for lockbox assets, based on a fixed asset-
to-CF table;

• A dynamic CF, computed based on recent lockbox value volatility;

Collateral factor oracles enable fine tuning the margin limits for each particular type
of collateral or position. E.g., for LP positions, which change slowly in value, leverage
limits as high as 50x or even 100x are possible, while for long/short positions in volatile
assets a dynamic limit can be imposed based on short-term volatility.
To prevent attacks, the absolute minimum CF is imposed system-wide. This parameter
is chosen by governance.

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