PredMart > Documentation > Risk Parameters

Risk Parameters

PredMart's risk management system is designed to protect both lenders and the protocol from losses while allowing borrowers to maintain competitive leverage. This page provides a thorough explanation of every risk parameter in the protocol: the LTV, liquidation thresholds, health factor calculations, and how these parameters interact to form a cohesive risk framework.

Understanding these parameters is essential for borrowers who want to manage their positions safely and for lenders who want to evaluate the protocol's risk profile.

The LTV

What is LTV?

Loan-to-Value (LTV) ratio is the maximum percentage of your collateral's value that you can borrow. For example, if your collateral is worth $1,000 and the LTV is 80%, you can borrow up to $800 USDC.

PredMart's Flat 80% LTV

PredMart uses a flat 80% LTV at all share prices. This gives borrowers uniform 5x max leverage regardless of whether their shares trade at $0.20 or $0.90.

For current LTV, leverage, and liquidation threshold values, see Protocol Constants.

Why the Model is Flat

PredMart uses a flat 80% LTV at all share prices. This simplifies the model: borrowers always know they can access up to 5x leverage regardless of where the share trades.

Risk Parameter Updates (Governance)

The LTV and buffer values are not permanently fixed. The protocol admin can propose new values through the timelocked governance system. Any change must go through:

  1. Proposal: The admin submits new values via the governance functions
  2. Waiting period: The timelock delay must pass (giving users time to react)
  3. Execution: After the delay, the admin executes the change
  4. Cancellation: The admin can cancel a pending proposal

This ensures that risk parameter changes are transparent and users have time to adjust their positions if needed.

The Liquidation Buffer

The liquidation buffer is the gap between the LTV ratio (your maximum borrowing limit) and the liquidation threshold (the point at which your position can be liquidated). The buffer provides a safety margin so that a position at maximum borrow isn't immediately liquidatable. For current buffer values, see Protocol Constants.

If you borrow the maximum (80% of collateral value), your health factor starts at:

Health Factor = (Collateral Value × 0.85) / (Collateral Value × 0.80) = 0.85 / 0.80 = 1.0625

This means you start with a ~6% buffer above the liquidation threshold. Your position would need the price to drop enough for the health factor to reach 1.0 before liquidation triggers.

Health Factor

Definition

The health factor is the single most important metric for borrowers. It represents how safe your position is relative to liquidation:

Health Factor = (Collateral Amount × Price × Liquidation Threshold) / Debt

Where: - Collateral Amount = Number of shares deposited - Price = The average price to sell $1,000 of shares into the order book (manipulation-resistant) - Liquidation Threshold = 85% (LTV + 5% liquidation buffer) — see Protocol Constants - Debt = Current owed amount (original borrow + accrued interest)

Interpreting the Health Factor

Health Factor Status Recommended Action
> 2.0 Very safe No action needed
1.5 – 2.0 Healthy Monitor periodically
1.2 – 1.5 Moderate risk Monitor frequently, consider adding collateral
1.0 – 1.2 High risk Add collateral or repay debt immediately
< 1.0 Liquidatable Position can (and will) be liquidated
< 0.95 Fully liquidatable 100% of debt can be repaid in single liquidation

How Health Factor Changes

Your health factor is affected by three variables:

  1. Price changes (largest impact): If the share price drops, your collateral value decreases. This is the primary driver of health factor changes.

  2. Interest accrual (slow, continuous impact): As interest accrues, your debt increases. Even with a stable price, your health factor slowly decreases over time.

  3. Your actions: Adding collateral increases health factor. Repaying debt increases health factor. Withdrawing collateral or borrowing more decreases it.

Worked Example: Health Factor Over Time

Starting position: - 10,000 shares at $0.70 - Collateral value: $7,000 - Borrowed: $5,000 - Health Factor = (10,000 × 0.70 × 0.85) / 5,000 = 5,950 / 5,000 = 1.19

After 30 days (20% APR, price unchanged): - Debt: $5,000 × (1 + 0.20 × 30/365) = $5,082.19 - Health Factor = 5,950 / 5,082.19 = 1.17 (slight decrease from interest)

After price drops to $0.60: - Collateral value: 10,000 × $0.60 = $6,000 - Health Factor = (10,000 × 0.60 × 0.85) / 5,082.19 = 5,100 / 5,082.19 = 1.00

The position is now at the liquidation threshold. Interest accrual and price drops both push you toward liquidation.

Per-Token Borrow Cap

The protocol limits per-token borrowing through two stacked ceilings — the tighter of the two binds.

The protocol limits per-token borrowing through two stacked ceilings — the tighter of the two binds. For current values, see Protocol Constants. At small TVL, the backend ceiling binds; as TVL grows, the on-chain cap eventually takes over.

Interaction with the per-market cap

The pool/effective cap sets the ceiling, but the actual borrow limit for a specific token may be lower due to the per-market cap — a liquidity-based ceiling that varies by market (see Oracle Pricing & Borrow Caps). Your effective max borrow is the smallest of all three.

Minimum Borrow

The protocol enforces a minimum borrow amount to prevent dust positions that would be uneconomical to liquidate. See Protocol Constants for the current value.

How Parameters Work Together: A Liquidation Walkthrough

Alice deposits 15,000 shares at $0.65 (collateral value $9,750, LTV 80%, threshold 85%) and borrows $7,000 — starting health factor = (9,750 × 0.85) / 7,000 ≈ 1.18. The price drops to $0.55: collateral value = $8,250, and her HF drops to (8,250 × 0.85) / 7,000 ≈ 1.00 — liquidatable. All 15,000 shares are seized and sold; debt (including accrued interest) is repaid, the liquidator fee is paid (see Protocol Constants), and any remaining USDC stays with the pool — Alice receives $0. Had she closed proactively while HF > 1.0, she would have kept that residual.

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