Collateral is any asset which a borrower must provide to take out a loan, acting as a security for the debt. Currently, Descent protocol only supports USDC as collateral.

Why Collateral is important?

Collateral acts as a form of security for the protocol. In the event that a borrower's vault fall below a certain liquidation threshold, anybody can liquidate the collateral (pay back the borrower's debt) and get a reward for it, reducing the risk of incurring bad debt by the protocol.

Supported collateral Assets

Currently the collateral asset we support is USDC.

How are collaterals added to the protocol?

Adding new collaterals to the Descent protocol involves a careful evaluation and integration process.

Users or community members propose new collateral assets through a governance mechanism. This proposal typically includes information about the proposed asset, its use case, and potential benefits to the protocol.

Collateral Data structure

Collateralisation Ratio

The collateralisation ratio determines the amount of Currency a borrower is allowed to mint relative to their deposited collateral. If the collateralisation ratio of currency xNGN with collateral USDC is 80%, this means that for every deposited USDC, the borrower can only mint at most least 80% xNGN worth of USDC.

Take this example,

Exchange rate: 1 USDC = 1,000 xNGN
collateralisation ratio = 80%
 
USER A deposits 100 USDC
USER A can mint at most 80% xNGN worth of 100 USDC 
    i.e 80 USDC * 1,000 (exchange rate) = 80,000 xNGN

As you can imagine, this check is enforced when a borrower wants to borrow a currency. It is important to have this gap especially for volatile collateral or currencies to reduce the possibilities of a position suddenly being under-collaterised before liquidations can take place. This threshold would vary per collateral per currency as their volatility has to be put into consideration.

Minimum Collateral

This is a parameter used to enforce a minimum collateral value a user can borrow a currency against. This is important to make sure positions are always profitable to liquidate after gas fees are considered. If a position of $1 has a health factor less than 1, if liquidated, the liquidator will get a profit of <= $0.1. If the current gas fees to do this is >= $0.1, it won't likely get liquidated because there's no profit to be made. Setting the minimum collateral value a user can borrow a currency against to be a reasonably high amount prevents this and this parameter would vary per chain due to varying gas fees per chain.

Debt Ceiling

This is set to cap the total amount of Currency that can be minted by all borrowers with a particular collateral at any given point in time. This helps manage the risk associated with a particular collateral.