Part 2: Wing’s Collateral Factor Standardization Model
The third article in Wing’s Risk Model series outlining Wing’s Collateral Factor Standardization Model.
If you missed the first and second article in this series, you can read them here: Introduction and Part 1.
The Collateral Factor represents the ratio of the maximum percentage of a collateral’s value that can be borrowed after collateralizing a certain asset. For example, if the Collateral Factor of ETH is 80%, then for every 1 ETH of collateral, the borrower is able to borrow assets with a value equal to or less than 0.8 ETH. In the Wing protocol, the Collateral Factor is specific to each asset and is adjusted based on the asset’s characteristics.
The Collateral Factor is closely related to the safety of all assets in the platform. If the Collateral Factor of an asset is too high, users can borrow more. But when the value of that collateral decreases, liquidations are more likely to occur and the value of the collateral may not be enough to repay the borrowed assets, causing the project to suffer losses;
If the Collateral Factor of an asset is too low, the amount that can be borrowed against it will be very low, and it will not be attractive to users, making the project uncompetitive.
Therefore, setting appropriate Collateral Factors is very important for asset safety and the healthy development of the Wing project. Wing ascribes great importance to asset security. Thus, we have designed our Collateral Factor Standardization Model. This model refers to Wing’s Assets Risk Model, the WING lock mechanism, and the Wing Insurance Pool mechanism.
Wing’s Assets Risk Model
Wing’s Collateral Factor Standardization Model is mainly built upon Wing’s Assets Risk Model and ties together asset liquidity and volatility to the Collateral Factor. Assets with large liquidity and low volatility are considered less risky and therefore have a higher Collateral Factor; while assets with low liquidity and high volatility have higher liquidation risks, so the Collateral Factor is lower.
WING Lock Mechanism
The voted on and approved WIP-14 introduced a locking mechanism that requires locking 3% of a borrowed assets’ value in WING in the Flash Pool to earn WING rewards. At present, the value of all such locked WING is about $3.5 million, which accounts for about 2.9% of the total borrowed assets’ value.
If the prices of collateral assets and borrowed assets change drastically and a liquidation is triggered, the collateral assets are all purchased by the liquidator to cover the cost of the borrowed assets. If the collateral’s value still cannot pay off the borrowed assets, the WING locked at the time of the borrowing will be liquidated first. If the liquidated WING is still not enough, it will continue to be reimbursed by the WING in the Insurance Pool.
Since the locked WING serves as a risk buffer before any reimbursements would need to be pulled from the Insurance Pool, the risk of asset loss in Wing is reduced. Thus, the Collateral Factor of each asset can be appropriately increased to enhance the competitiveness of the Wing project.
Wing Insurance Pool Mechanism
The Insurance Pool mechanism has been a part of Wing since its inception. The current total value of WING in the Insurance Pool is approximately $5 million, accounting for approximately 4.1% of the total value borrowed on Wing.
As mentioned previously, if a liquidation occurs and neither the collateral nor the WING locked by the borrower is enough to cover the cost of the borrowed assets, the remaining amount will be reimbursed by the Insurance Pool.
Thus far, all liquidations on Wing have been enough to cover the cost of the borrowed assets. Thus,no payments from the Insurance Pools have occurred so far. The Insurance Pool provides a unique risk buffer for the Wing project, so Wing can withstand higher risks. Taking into account the risk buffer of the Insurance Pool mechanism, we appropriately increased the Collateral Factor of each asset to enhance the competitiveness of the Wing project.
We have re-evaluated the Collateral Factor of each asset according to Wing’s Collateral Factor Standardization Model. The Collateral Factors of some assets are currently suboptimal. Therefore, we will continue to discuss, propose and host community votes to decide which assets’ Collateral Factors should be adjusted. In order to avoid potential liquidations caused by any changes, after a Collateral Factor adjustment proposal is passed, we will gradually adjust according to the following rules:
- If the Collateral Factor is adjusted downwards, the adjustment will be executed in intervals where each individual adjustment shall not exceed 5%;
- If the vote is passed, there will be a 14-day grace period before the adjustment starts.
