What safety measures does Native have in place?

Potential risks

Each asset listed on Native has specific risk values, shaping how they are supplied and borrowed within the market. It is crucial for the Native community to understand these risks by:

• Assessing smart contract security

• Understanding the risks of centralization

• Understanding market risks

Centralization risks

Some tokens have increased risks of centralization, potentially being exposed to a single point of failure in their governance. The counterparty risks, including trust factors, are too high for these assets to guarantee the solvency of the protocol.

Conversely, some decentralized tokens are not battle-tested and cannot be used as collateral.

Market risks

1. Liquidity risks

Liquidity, determined by on-chain liquidity and trading volume, is critical for the money market’s liquidation process. Liquidity risks can be mitigated through supply and borrow caps and by adjusting liquidation thresholds.

2. Volatility risks

Price volatility can negatively impact the value of collateral. To cover liabilities and ensure the protocol's solvency, collateral risk can be mitigated by setting appropriate Loan-To-Value (LTV) ratios and liquidation thresholds. The most volatile assets have lower LTVs (35-40%) and lower liquidation thresholds to protect users from sudden price drops that could lead to under-collateralization and liquidation.

• Least volatile assets: Stablecoins, WETH, WBTC

  • Highest LTV (70-80%)

  • Highest liquidation threshold (75-88%)

• Most Volatile Assets: Typically have low LTVs (35-40%) and lower liquidation thresholds to protect against sharp price drops.

3. Market capitalization (MCAP) risks

Market capitalization (MCAP) represents the total value of all coins in circulation, calculated by multiplying the number of coins by the current market price. MCAP is crucial for understanding market size and liquidation potential.

• Small market cap: Generally, assets with smaller market caps are less mature and more volatile. Liquidation parameters for these assets are adjusted to mitigate price impact risks.

• High market cap: Indicates a more developed ecosystem with higher liquidity, facilitating liquidations with less impact on prices.

Risk parameters and safety features

This section define the thresholds and limits for borrowing and collateral to ensure market stability and protect user assets.

Loan to Value (LTV)

• The Loan to Value (LTV) ratio defines the maximum amount that can be borrowed against specific collateral, expressed as a percentage.

• For example, an LTV of 75% means you can borrow 0.75 ETH worth of assets for every 1 ETH of collateral.

• , which can change with market conditions.

Liquidation Threshold (LT)

$Liquidation\hspace{0.1cm} Threshold = \frac{Σ Collateral_{i} \hspace{0.1cm}in \hspace{0.1cm}ETH*Liquidation\hspace{0.1cm}Threshold_{i} }{Total \hspace{0.1cm}Collateral\hspace{0.1cm} in \hspace{0.1cm}ETH }$

• The liquidation threshold is the LTV ratio at which a position becomes under-collateralized, leading to potential liquidation.

• The liquidation threshold for each wallet is calculated as the weighted average of the thresholds of the collateral assets.

Example:

• Assume USDC has a liquidation threshold of 88%.

• A user provides $1,000 worth of USDC and borrows $850 worth of assets (85% LTV).

• If the value of the borrowed assets increases to $950, the LTV rises to 95%, exceeding the liquidation threshold.

In this example, the borrower will be liquidated to maintain over-collateralization.

Health factor

The health factor is a numeric representation of the safety of supplied assets against the borrowed assets. It measures an account’s proximity to a liquidation.

• A higher health factor indicates a safer state against liquidation, reducing the risk of borrowers defaulting on their loan.

• When the health factor drops below 1, the position is liquidated to maintain solvency.

Calculation

$H_{f} = \frac{Σ Collateral_{i} \hspace{0.1cm}in \hspace{0.1cm}ETH*Liquidation\hspace{0.1cm}Threshold_{i} }{Total \hspace{0.1cm}Borrows\hspace{0.1cm} in \hspace{0.1cm}ETH }$

An account's health factor = 1 when:$∑(CollateralLiqThreshold*CollateralAmount*CollateralValue) =∑(LoanAmount*LoanValue)$

Monitoring health factor

When an account's health factor drops below 1, liquidators repay the debts and seize collateral, determined by the close factor. To avoid liquidation, it is crucial to monitor and maintain a high health factor.

Impact of price fluctuations

Price fluctuations of stablecoins and other assets can affect your Health Factor. For example, if 1 USDC trades at 0.95 USD due to market conditions, it impacts the overall value of your collateral.

Effects of health factor changes

Depending on the value fluctuation of your collateral, your health factor will increase or decrease:

• Health factor increases: Improves the borrow position by making it less likely to reach the liquidation threshold.

• Health factor decreases: Increases the risk of liquidation as the value of collateralized assets decreases relative to borrowed assets.

Ways to Improve health factor

• Depositing more collateral

• Repaying part of your loan

Close factor

• Determines the maximum percentage of a borrower's collateral that can be liquidated in a single event.

• Limits the amount a liquidator can liquidate when a borrower exceeds their borrowing limit.

• Protects borrowers from excessive liquidation when a borrowing position slightly surpasses the limit.

• , reaching its maximum when the borrowed value hits a critical value ("c").

On Native, the close factor is set to 0.5. This means that during a liquidation event, only up to 50% of a borrower's outstanding debt can be repaid at once. This ensures that borrowers are not entirely liquidated in one transaction, providing them with a chance to recover their position while protecting the platform's liquidity.

Supply cap

Supply caps specify the maximum amount of an asset supplied to Native. They serve several purposes:

• Risk limitation: Limit the market’s exposure to riskier assets.

• Volatility control: Reduce volatility within the protocol’s collaterals.

• Protection against exploits: Prevent infinite minting exploits.

For example, listing a new token with low market capitalization could lead to rapid price swings or drops, causing liquidations that are difficult to unwind. A supply cap can mitigate these risks by limiting the amount of such tokens that can be used across the protocol.

Factors affecting supply cap

• On-chain liquidity of the asset

• Total volume of collateral assets in the market

Borrow cap

Borrow caps specify the maximum amount of an asset that can be borrowed from the Carbon money market. They help in:

• Preventing price exploits: Avoid traditional and flash borrowing of assets vulnerable to price manipulation, which could lead to market insolvency.

• Restricting short interest: Limit the amount of short interest that can be expressed on an asset.

Listing a token with low market capitalization may cause protocol instability if the borrowed amount is high relative to its circulating supply. This can create a downward price spiral if the same token is used as collateral and gets liquidated as its price drops.

Factors affecting borrow cap

• On-chain liquidity of the asset

• Total volume of borrowed assets in the market