Risk Parameters

Chedda lending pools are configured with risk parameters that allow support for a wider range of assets.

For a token to be integrated in a pool it must meet minimum metrics discussed below. Tokens with higher risk profiles are configured with stricter risk parameters.

Tokens on Chedda are classified in one of the following tiers:

Asset Tier	Asset Class	Market Cap	Liquidity	Volume (24h)
Tier 1	Well circulated stable coin	$10 B	$100M	$1B
Tier 2	Large caps (BTC, ETH)	$10 B	$50M	$1B
Tier 3	Other large cap tokens	$1 B	$20M	$100M
Tier 4	Mid cap tokens	$200 M	$5M	$50M
Tier 5	Small cap tokens	$50 M	$1M	$1M

In addition to these requirements, all assets on Chedda must meet all these additional requirements:

1. Token contract audited by reputable 3rd party.

2. Owner not having admin rights to mint more tokens.

The risk parameters are set as follows based on the asset tier.

Tier	LTV	Liquidation Threshold
Tier 1	85%	93%
Tier 2	75%	85%
Tier 3	65%	80%
Tier 4	40-50%	55-65%
Tier 5	25-40%	45-60%

Due to changes in market conditions, it is possible for an asset to move between asset tiers. In that case, the tier an asset falls in is updated to reflect current market conditions on an ongoing basis.

Pool and token risk parameters are updated through protocol governance proposals.

In addition to limitation on tokens, additional risk parameters are configured per pool and discussed below.

Supply Caps

Supply caps limit the amount of a token that can be supplied in a pool. This limits the pools' exposure to the token. The supply cap is set in an absolute value, representing the maximum amount of an asset that can be deposited in a pool.

For example, a Tri-crypto pool with large cap tokens would have a supply cap for ETH set to 1000 ETH.

Borrow Caps

Borrow caps are set per collateral token, and represent the amount of an asset that can be borrowed with the given collateral. Borrow caps ensure that in case of adverse market conditions, the collateral can be efficiently liquidated without hugely impacting token price.

Borrow caps are set at a percentage of the average daily trading valume and can be adjusted to reflect changing market conditions.

Example: The borrow cap for a small cap token with a $20M market cap and $250K average daily trading volume would be set to a maximum of $25K, meaning borrowers can borrow a total of $25K of asset value, using this token as collateral.

Minimum Position Size

Each lending pool defines a minimum size of a borrow position that can be opened or maintained. When opening a position, the borrowed amount must be >= the minimum position. For partially closing positions, the remaining borrow amount must be >= minimum position size.

Minimum positions are defined so that it is more likely that any position that becomes insolvent could be liquidated profitably.

Isolated Collateral Mode (ICM)

Collateral tokens in a pool share liquidity of the pool asset. In isolated collateral mode, only the value of a single collateral token is used to determine the amount of asset an account can borrow. This limits cross-asset risk in a pool while allowing multiple collateral tokens to share pool asset liquidity.

Example: In a meme coin pool two popular meme coins, DOGE an SHIB can be used as collateral to borrow ETH. If an account has multiple collateral tokens deposited, only the value of the designated collateral token is used to determine their borrow capacity.

Isolation mode is the default mode of collateral on Chedda. Pools that do not operate in isolation mode operate in shared mode.

Loan to Value

The loan to value sets the maximum asset value that can be borrowed per collateral value. Less risky assets such as stable coins have a higher LTV close to 90% and more risky assets have a lower LTV, typically less than 50%.

The max amount an account can borrow is dependent on the LTV of collaterals.

In shared mode, this is calculated as:

$$MaxBorrow = ∑(CollateralValue_i * LTV_i)$$

In isolated mode, the max borrow is calculated as:

$$MaxBorrow= CollateralValue * LTV$$

If an account has multiple collateral tokens deposited in isolated mode, only the designated collateral value is used to determine the max borrow amount.

Health Factor

The health factor is a measure of how solvent a position is. The health factor for a position is calculated as:

$$HF = ∑ (CollateralValue_i * LiquidationThreshold_i) / DebtValue$$

A health factor > 1 represent a solvent account and a health factor < 1 represents an insolvent account. Insolvent accounts can be liquidated.

Liquidations

An account with a health factor < 1 can be liquidated. In a liquidation event, the liquidator buys the collateral backing the position at a discount and repays the loan, so the pool stays fully collateralized.

Any market participant can participate in liquidations, provided the supply the asset amount being liquidated.

Reserve Factor

The reserve factor represents the percentage of the interest earned on the platform that is retained by the protocol. A reserve factor of 10% means 10% of interest is retained by the protocol and 90% goes to liquidity providers.

The reserve factor is higher for pools with lower tier collateral tokens.

Final Backstop

Chedda pools are constantly monitored and any positions that are insolvent are efficiently liquidated. In exceptional events where an insolvent position is not liquidated in time, a position can become undercollateralized and accrue bad debt, such that the value backing a collateral is not sufficient to pay off the outstanding loan. where there is a shortfall of assets. In this case, there are 3 steps that can be taken to return the pool to solvency:

1. Liquidate position to recover a part of the debt covered by collateral.

2. Recapitalize from pool reserve.

3. Sell $CHEDDA tokens from pool locking gauge to cover the bad debt.

These steps are taken in order if the first step is not sufficient to recapitalize the pool.More on step 3 can be found in the shortfall event handler section.