đĄī¸Debt Pricing & Risk
Synonym uses a confidence-interval pricing approach to manage cross-chain liquidations during times of volatility.
Confidence Intervals & Asset Looping
Pyth oracles operate with confidence margins, which is a different mechanism implementation when compared to other providers. The confidence margin is subtracted from your deposit values and added do your debt values. When volatility is high there is the chance that liquidation can occur even if you are borrowing the same asset. Why is this done? Synonym is natively cross-chain and therefore needs to account for cross-chain communication and messaging times to ensure that liquidations proceed properly and eliminate the risk of bad debt for the protocol. We always recommend that you keep your collateralization ratio sufficiently high to account for this.
Example:
The formula our protocol has for collateral & debt price considers confidence intervals and price to account for volatility:
collateral price = price - 4.24 * confidence
debt price = price + 4.24 * confidence
E.g. when ETH price is $3240.69911225
and the confidence is $2.62411225
, so the prices are:
collateral price of ETH `
3240.69911225 - 4.24 * 2.62411225 = 3229.57287631
debt price of ETH
3240.69911225 + 4.24 * 2.62411225 = 3251.82534819
During times of high volatility, the confidence spikes, resulting in much higher difference between collateral and debt prices.
Nov 2024 Note:
Our current setup has a confidence interval of zero, which means collateral price is equal to debt price. The precautionary mechanism has been disabled for the time being and might be re-enabled in the future if our risk analysis warrants it.
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