Collateral Cap in DeFi: Limiting Risk Exposure

Collateral Cap is a characteristic of a security designed to diversify lending risk on a protocol from a single asset.

What is Collateral Cap?

Collateral Cap is an element of collateral that allows to diversify the risk for financing in different protocols, as well as to diversify loan risk from one asset. The limit is a way to measure and limit the “borrowing power” of each asset. A collateral limit defines an effective market collateral, that is measured in units from the relevant coin, and has the function of measuring and limiting the “borrowing power” of every asset.

Only 1 million tokens can be used as collateral for borrowing. Suppose the market collateral limit is set at 1 million, in which case only 1 million tokens can be used as collateral for borrowing.

The system aims to reduce the systemic risks posed by individual assets. It is particularly concerned about the risks associated with assets with low liquidity in the chain. If a protocol withdraws an asset by liquidating the collateral provided, it cannot be converted or exchanged for other assets because of the lack of intra-chain liquidity.

It is possible to say that the collateral limit is a setting for each coin to control and limit the risks of the protocol, as well as to control and limit the risks of the protocol associated with each token market. Various reasons can be used to create abnormal and unexpected price drops. From endless coin or token trading to exploits of any kind. 

The limits of collateral limits are limited by the minimum potential damage that a protocol will suffer if there is a decrease or extreme drop in prices in the relevant token markets. This is an important feature that must be monitored and adjusting, even in volatile market conditions. Mismanagement could affect the ecosystems to which they are linked through chain effects, and also influence the behavior of lending and borrowing protocols.

A participant in the Iron Bank project is Paff. The Iron Bank is a decentralised lending platform that focuses on capital and its efficiency. It allows protocols and individuals to buy and supply cryptocurrencies on Ethereum, Fantom and Avalanche. The system is designed for the supply and borrow of bitcoins from users in different countries. It provides capital efficiency with trusted institutions as the liquidity and basis for DeFi and Cefi. This helps create more safe defi loan systems by providing capital increased from trusted institutions as the liquidity base and support forDeFi and CeFi. 

In order to provide Whitelist Lending with Secured and Unsecured Lending, Iron bank uses smart contract automation. The Iron bank partners include Fixed Forex (Keep3r Network), Yearn Vaults (Yearn Finance), Yearn Vaults (Yearn Finance), Yearn Vaults (Yearn Finance), Yearn Vaults (Yearn Finance), Alpha Homora (Alpha Venture DAO), Multichain, PleasrDAO and others. At the same time, it is protocol-oriented and nonprotocol users can also supply or borrow from Iron Bank. 

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