Collateral Allocation

The selection and distribution of the right kind of collateral in the correct side of the balance sheet is very important in order to prevent the volatility risk from jeopardizing the solvency of the protocol.

• Collateral Quality: - Tokenized Securities and CeFi Stables (best as a bootstrap and fine as long as the target exchange rate is the same so, $ to $). - Δ Neutral positions/hedged positions over productive assets, to offset carry risk and compound protocol's profitability (L1 tokens, RWA, housing). - Unhedged positions on decentralized collateral. The Equity of the protocol is not counted as collateral but as Debt and, as such, is always allowed to grow in the protocol's Balance Sheet as long as it's fully covered by protocol's Credit and/or collateral reserves.

• Collateral Allocation: - Volatile collateral: Allotted to the Money Market, so that the volatility risk is transferred to borrowers and managed by the liquidation system (e.g. unhedged decentralized collateral). - Non Volatile collateral: Assigned to Seigniorage as a backing to obtain a stable CR (e.g. USDC, hedged L1 skating derivs, hedged RW productive assets).

• Collateral Quantity: - DCRs or Dynamic Collateral Requirements influence the growth in protocol's credit and the amount of collateral in the Money Market. They are charged to new borrowers and adjust the LTVs scores of every new CDP according to different economic conditions and following the expansion/contraction phases of the protocol's own balance sheet. - MCRs or Minting Collateral Requirements influence the growth in protocol's debt and the amount of collateral backing the Seigniorage process. They are raised whenever the protocol needs to backstop the acquisition of new debt and decreased whenever decollateralization has to take place.