Account Risk

The goal of measuring account risk is to maintain stability and minimize risk for both lenders and borrowers. Most lending protocols do this by comparing borrowed assets to collateral(supplied) value, using a Loan-to-Value (LTV) ratio based on the collateral type. Factorial takes it further with a scenario-based approach that factors in "worst-case" outcomes, offering a smarter, more resilient way to evaluate account stability.

Motivation

The traditional Loan-to-Value (LTV) model has inherent limitations when assessing risk for collateralized loans.

1. Correlation Oversight: The LTV model fails to account for offsetting price risks when the collateral and loan assets are highly correlated. For example, borrowing TON by supplying tsTON or a TON-USDT LP token as collateral. In such cases, the impact of TON’s price fluctuations on account health is partially or fully offset. However, the LTV model does not factor in this offset, leading to overly conservative or inaccurate risk assessments.

2. Nonlinear Risk Dynamics: When DEX LP tokens are used as collateral, the LTV model fails to account for impermanent loss, which occurs as the pool rebalances due to price fluctuations in the underlying assets. By ignoring this dynamic, the LTV model inaccurately assesses the true risk profile of LP collateral.

To address these issues, Factorial introduces a comprehensive risk assessment model that applies to all collateral and loan asset types:

1. Correlation-Based Risk Offset: When the collateral and loan assets share underlying correlations, the risk is dynamically offset, reflecting reduced price volatility.

2. Redefining Collateral Risk: Collateral with DeFi positions is assessed by factoring in both underlying asset risks and DeFi-specific risks like impermanent loss, and smart contract vulnerabilities, etc., ensuring a comprehensive risk evaluation.

This framework ensures a more accurate and adaptable risk assessment, enhancing both the security and efficiency of lending activities across all types of collateral and loan assets, and setting a new standard for DeFi risk management.

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Calculation

$$Risk Ratio = \frac{\sum_{i}{f_i\cdot abs(S_i -B_i)}}{S -B}$$

$$Leverage = \frac{S}{S -B}$$

• $f_i$ : Risk Factor of i-th Asset
• $S_i$ : Supplied dollar value of i-th asset in an account [ S : Total Supplied ]
• $B_i$ : Borrowed dollar value of i-th asset in an account [ B : Total Borrowed ]

  • Assets within DeFi positions are decomposed and calculated in as the same as native assets.

Risk Parameter

• Risk Factor of i-th asset

  • DeFi risk : contract/impermanent loss risk

  • Asset risk : inherent asset risk (ie. market risk, volatility, liquidity risk, etc.)

• max_riskRatio : Exposure risk of position relative to net asset. Limit required to open or adjust a position

• max_leverage : Risk associated with loan size to net asset. Limit required to open or adjust a position