Collateralization and Minting Mechanism

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As mentioned in our previous article, there are 2 ways for users to obtain ʟUSD. First route is through rewards distributed for various activities within the DEVITA ecosystem, explored in our previous article here. The second option is through DEVITA’s ʟUSD minting process: users may opt to mint their own ʟUSD upon collateralization of their own LIFE token at a Collateralization Ratio (C-ratio) of 4.5 to 1. This C-ratio liquidation mechanism is created in order to nurture the symbiotic relationship between ʟUSD and LIFE, to facilitate two tokens benefit one another. Collateralization of LIFE accredits ʟUSD to be minted while the stable value of ʟUSD preserves the value of the collateralized LIFE in respects to the C-ratio. Due to the general tendency of digital assets being volatile, LIFE token included, the C-ratio cannot always remain constant. As the price of LIFE fluctuates overtime, the C-ratio is subject to adjust accordingly.

C-ratio and Liquidation Mechanism

If the C-ratio rises above 450% (4.5:1) by any amount, users can choose to either:

1. Mint more ʟUSD proportionate to the rise in the C-ratio
2. Simply withdraw the proportionate amount of LIFE

If the C-ratio drops below 450% (4.5:1) by any amount, users can choose to either:

1. Burn the percentage of ʟUSD proportionate to the decrease of the C-ratio
2. Add more LIFE in order to adjust their C-ratio to its original state of 4.5:1

In cases where the C-ratio drops drastically to the range of 250% — 300% or below, user accounts will be flagged and users will be notified. After that, users will be given a 3-day grace period before the “Liquidation” event is called. During the 3-day grace period, users must execute the actions listed above within 3 days to avoid the “Liquidation” event. (subject to change)

Here is an example to simplify the mechanism of C-ratio fluctuation. To simplify the calculation process for this demonstration, let’s assume:

1. At the time of Teddy’s collateralization, the market value of 1 LIFE token was $0.50
2. Teddy has collateralized 9 LIFE tokens

The total market value of Teddy’s collateralized LIFE is $4.50 ($0.50 x 9). Since the value of ʟUSD is constant at $1.00, with the LIFE:ʟUSD = 4.5:1 C-ratio, Teddy has minted 1 ʟUSD.

Figure1

Case 1:

Couple of days after Teddy’s collateralization, the market price of LIFE token has doubled (from $0.50 to $1.00), also increasing the value of Teddy’s collateralized LIFE tokens proportionally (from $4.50 to $9.00). In turn, Teddy’s C-ratio has also increased to 900% (9:1)

Figure2

Now, in order to return his C-ratio back to LIFE:ʟUSD = 4.5:1, Teddy can choose to either:

Option 1:

Mint more ʟUSD proportionate to the rise in the C-ratio.

In this example, mint 1 more ʟUSD

LIFE : ʟUSD = $9.00 : $2.00 = 2(4.5) : 2(1) = 4.5 : 1

Figure3

Option2 :

Simply withdraw the proportionate amount of LIFE

In this example, withdraw 4.5 LIFE ($4.50)

LIFE : ʟUSD = 1.00 (9–4.5) : 1.00 = $4.50 : $1.00 = 4.5 : 1

Figure4

Case 2:

Couple of days after Teddy’s collateralization, instead of increasing, the market price of LIFE token has decreased (from $0.50 to $0.25 ), also decreasing the value of Teddy’s collateralized LIFE tokens proportionally (from $4.50 to $2.25). In turn, Teddy’s C-ratio has also decreased to 225% (2.25:1)

Figure5

Now, in order to return his C-ratio back to LIFE:ʟUSD = 4.5:1, Teddy is given 3 days to either:

Option 1:

Burn the percentage of ʟUSD proportionate to the decrease of the C-ratio

In this example, burn $0.50 ʟUSD

LIFE : ʟUSD = 4.5 / 2 : 1 / 2 = 2.25 : 0.5 = 4.5 : 1

Figure6

Option 2:

Add more LIFE in order to adjust their C-ratio to its original state of 4.5:1

In this example, add 9 more LIFE

LIFE : ʟUSD = 18($0.25) :$1.00 = $4.50 : $1.00 = 4.5 : 1

Figure7

BONUS QUESTION:

What happens to my collateralized LIFE when I use the minted ʟUSD within the DEVITA platform?

Your LIFE tokens will remain safely collateralized until you burn the same exact amount of ʟUSD that you have minted. Let’s consider an example where you have collateralized $9.00 worth of LIFE tokens and minted $2.00 ʟUSD, and you have spent $1.00 ʟUSD within the DEVITA ecosystem. Through various actions mentioned in our previous article, you can earn ʟUSD rewards to replace the spent $1.00 ʟUSD. Once you burn $2.00 worth of ʟUSD, your collateralized LIFE tokens will be unlocked and returned back to your custody.

Although we have attempted to simplify the mechanism of collateralization and minting by providing simplified examples, automation of these functions requires a series of smart contracts to interact with each other in perfect harmony. Stay connected with our Telegram community to keep up to date with any news or announcements. Also let us know what topics you would like to read about on our Medium!

*** The information provided in this article may be subject to changes and/or updates. ***