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Our new lending rules help protect your crypto collateral from liquidation

date August 21, 2020 time 5 min read 1311 views

Selling your collateral is always a last resort. We’d much rather return it to you than sell it mid-term. However, market volatility makes this difficult. What appears to be a sensible Loan-to-Value (LTV) ratio one day becomes a precarious number the next. 

Crypto market volatility won’t go away any time soon. Rather than ignoring the slip and slide of the market, we’ve built a dynamic LTV that reacts to volatility as it happens. While this will impact when you can borrow and how much excess you can recall, it will help protect you from premature liquidation.

A quick review of variables

To understand the new rules, you need to understand these variables:

Collateral value rate (CV)

The collateral value rate (CV) is the value of your collateral expressed as a percentage of the total due on the loan (the loan amount, interest, and matching fee). When the CV reaches 110%, we usually liquidate a loan.  

CV = (value of your collateral / total due on the loan) * 100

Collateral-to-Value required rate (CTV)

The CTV measures the minimum collateral we need to issue a loan expressed as a percentage of the total amount due on the loan. It’s the inverse of the Loan to Value rate (LTV). For example, bitcoin has an LTV of 66%, so the default CTV is 150%. 

The new rules calculate CTV dynamically over a 30-day period. If the CTV ever reaches 400%, you won’t be able to borrow against that cryptocurrency until it falls again. 

New CTV = default CTV * ((current price/lowest price) * 100))

Collateral rate (CR)

The collateral rate (CR) combines the value of your collateral, the total due on the loan, and the default LTV into a percentage. The CR determines how much excess you can recall and the maximum crypto you can place in an isolated loan. 

CR = x / (total due on loan) x 100

Where x = (crypto amount) * (crypto value) * (LTV)… repeated for every crypto in your collateral balance.

These variables form the basis for the new rules, which I’ll explain now. 

What are the new rules?

The new rules apply to large upswings in cryptocurrency prices only, commonly referred to as a bull market. Why? Because sudden increases are often followed by equally sudden drops – and we don’t want to leave you high and dry!

#1. The CTV must be less than 400% to qualify as collateral

Over the course of a 30-day rolling period, our system will note the lowest price versus the current price of each supported cryptocurrency. If the current price is higher than 140% of the lowest price, we must calculate a new CTV.

Let’s assume BAND’s current price is $1.60 and it’s lowest price is $1.00 in a 30-day period. 

BAND’s default LTV is 40%, so it’s default CTV is 250%. 

Under the new rules, a new CTV would be calculated as follows:

CTV = 250% x ((1.6/1) * 100))

= 400%

In this example, BAND wouldn’t qualify as collateral for new loans. Once the price falls, the CTV will also fall, and BAND will be available for new loans again. 

#2. Recall excess for isolated loans

The collateral value rate is used for liquidation, but it doesn’t take into account the dynamic CTV, which is an important risk management factor. 

Under the new rules, you will only be able to recall excess once the collateral value rate exceeds the default CTV multiplied by 110%:

Recall excess enabled = collateral value rate > (default CTV x 110%)

Let’s take a look at this with another example using BAND. 

BAND’s default CTV is 250% so you’d only be able to recall excess when the collateral value rises above 275% (250% x 110%).

And when you recall excess, you can only recall down to that threshold (in this example, 275%). 

#3. Recall excess for multi-collateral loans

Recall excess for multi-collateral loans will only kick in when your collateral rate (not collateral value rate) is greater than 110%. 

As mentioned earlier, the collateral rate is more important than your collateral value since it combines the LTV, an important risk factor, into the figure. 

Using our earlier BAND example, if you wanted to recall excess you need to make sure you have sufficient collateral to maintain that collateral rate of above 110%. 

How these new rules affect you

If you’ve survived the math, you’re probably wondering what happens next. How will these changes affect your current and future borrowing? 

The biggest change is that your collateral will survive a sudden drop following any unusual spike in prices. You could notice some or all of the following:

  1. You can no longer borrow against a cryptocurrency (even if you’ve done so in the past). We temporarily suspend cryptos with a CTV of over 400% and you won’t be able to borrow against them until the price drops or stabilizes over a 30-day period. 
  1. You might be unable to recall excess even if your collateral value is over 110%. Recall excess now integrates the LTV into the collateral value for both multi-collateral and isolated loans (for calculations, see above).  
  1. You might be unable to recall as much excess as before. It depends on the collateral rate, not collateral value. If you have a multi-collateral loan with a collateral rate of 115% but a collateral value of 130%, you can only recall 5%.

But if there are no large upswings in the market, you probably won’t notice any difference. 

FAQs

Why make this change now?

We’re continually evolving our lending model to protect you. We’ve noticed a pattern where sudden price increases quickly result in drops. When you borrow or recall excess at these artificially higher prices, you put your collateral at increased risk of liquidation. Our new rules prevent this. 

What is the difference between collateral value rate, collateral value required rate, and collateral rate?

Collateral value rate

The collateral value rate (CV) is the value of your collateral expressed as a percentage of the total due on the loan (i.e. loan, interest, and matching fees):

CV = (value of your collateral / total due on your loan) * 100

We use the CV to determine at which point we need to liquidate your collateral. For example, if the CV falls to 110% during your term, it’ll be sold to repay the investor. 

Collateral value required rate

The collateral value required rate (CTV) is the minimum collateral required as a function of the price over 30 days, expressed as a percentage:

CTV = (default CTV * (current price/lowest price)) * 100

The CTV integrates pricing trends and helps us determine when you can borrow against a supported cryptocurrency. It also feeds into the collateral rate, which in turn determines how much excess you can recall and the maximum crypto you can place in an isolated loan. 

Collateral rate

The collateral rate (CR) combines the collateral value rate, CTV, and the total due on your loan expressed as a percentage. The CR determines how much excess you can recall and the maximum crypto you can place in an isolated loan. 

CR = x / (total due on loan) x 100

Where x = (crypto amount) * (crypto value) * (LTV)… repeated for every crypto in your collateral balance.

Will this change affect my existing loans?

Yes, the rules take effect immediately. 

Do the new rules impact price falls (a bear market)?

No, we already have protection measures for rapid price drops such as auto top-up. The new rules protect against artificially inflated prices (the so-called “pump and dump”) resulting in decisions that adversely affect your collateral’s value in the long run. 

I don’t understand the calculations. Can you help?

Absolutely! Call us on +1 646 809 8338, book a call, or drop us an email at [email protected] and we’ll take your through a few real-world examples. 

My collateral value rate is over 110% and I can’t recall excess. Why?

The collateral value rate only measures your collateral’s value against the total due on your loan. We use this for liquidation, but for recall excess, we must include the LTV and CTV into the equation so you don’t adversely affect your collateral’s value in the long term. 

On an isolated loan, you can only recall excess when the collateral value rate exceeds the default CTV multiplied by 110%. Bitcoin’s default LTV is 66%, so it’s default CTV is 150%. So you can withdraw excess bitcoin above the collateral value rate of 165%. 

For multi-collateral loans, you can only recall excess when your collateral rate (not collateral value rate) is greater than 110%. Your collateral rate is calculated based on the value of your collateral balance and the respective LTVs for each crypto. 

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Chris Roper

Chris Roper

Communications Manager

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