Asset Risk Parameters

Loan to Value (LTV)

The Loan to Value (”LTV”) ratio specifies the maximum amount of assets that can be borrowed with a specific collateral.

It is expressed as a percentage. For example, at LTV = 75%, for every 1 ETH worth of collateral, borrowers will be able to borrow 0.75 ETH worth of the corresponding currency.

Each asset has its own LTV.

Health Factor

The Health Factor quantifies the security of your deposited assets relative to your borrowed assets and their intrinsic value. A higher Health Factor indicates a safer status for your funds, reducing the risk of liquidation and the likelihood of loan default. However, if the Health Factor drops to 1, your deposits will be subject to liquidation.

Calculation of Health Factor

Health Factor=Value of Collateral×Liquidation ThresholdValue of Borrowed amountHealth Factor=Value of Borrowed amountValue of Collateral×Liquidation Threshold​

$$HealthFactor = \frac {Value \ of\ Collateral×Liquidation\ Threshold ​ } {Value\ of\ Borrowed\ amount}$$

The Health Factor is calculated as the value of your assets multiplied by a liquidation threshold, and dividing that total by the value of your borrowed assets. This threshold provides a safety buffer against the volatility risk of the collateral.

Example

The price of ETH is $2000, and with a liquidation threshold of 0.75, if Alice borrowed $1000, the Health Factor is calculated as follows:

$$HealthFactor = \frac {2000*0.75 } {1000} =1.50$$

Liquidation Scenario

Liquidation happens when your Health Factor drops below 1. Changes in the value of your supplied collateral and borrowed assets can affect your Health Factor, so it's important to monitor your debt position closely to avoid this.

If the value of your supplied collateral is less than your borrowed amount, Pike faces the risk of not having enough funds to repay its depositors. To safeguard the protocol, market arbitrageurs will close your debt position by selling your supplied collateral to pay off the debt. This process is known as liquidation.

Example

In the earlier example involving Alice, assuming the price of ETH falls to $1000, the Health Factor will fall below 1, and is calculated as follows:

$$HealthFactor = \frac {1000*0.75 } {1000} =0.75$$

In this scenario, liquidators will sell Alice’s ETH for USD and use the proceeds to repay Alice's debt, thereby restoring the Health Factor to above 1. Additionally, liquidators will collect a liquidation fee during this process.

Avoiding Liquidation

To avoid a forced liquidation, borrowers must ensure their Health Factor remains above 1. Borrowers can either supply additional assets or repay their debt to increase their Health Factor.

A higher Health Factor provides greater resilience against market volatility. For example, a Health Factor of 2 offers protection against a 50% drop in collateral value.