Protocol Safeguards and Parameter Framework

In a lending protocol, each supported asset is assigned parameters that reflect its risk profile. These parameters determine how the asset can be supplied, borrowed, and collateralized. The underlying goal is to mitigate the market and liquidity risks tied to different token behaviors, ensuring the system remains solvent.

Overcollateralization and Liquidations

Borrowers are typically required to provide overcollateralization, acknowledging that collateralized assets can fluctuate in value. Sufficient headroom and clear incentives help keep positions safe when market prices move against borrowers. If the collateral value sinks below a set threshold, a portion of that collateral becomes eligible for liquidation. Liquidators are incentivized via a liquidation bonus, acquired when they purchase discounted collateral to repay part of the borrower’s debt. This mechanism aims to maintain a healthy buffer between the protocol’s assets and liabilities.

Deposit Caps

Deposit caps define the maximum quantity of a particular asset that can be supplied to Mutuum. Imposing these limits helps the protocol avoid outsized exposure to potentially risky or illiquid tokens, while mitigating exploits related to unlimited asset minting. Determining an appropriate deposit cap generally involves evaluating on-chain trading volume, price stability, and the historical performance of the asset.

Borrow Caps

Borrow caps represent a ceiling on how much of a given asset can be borrowed within Mutuum. These caps are crucial for tokens prone to price manipulation or liquidity shortfalls. By restricting the borrowing volume—whether for regular or flash loans—Mutuum significantly reduces the chance of insolvency tied to sharp or manipulated price fluctuations

Restricted Collateralization Mode

Mutuum may categorize certain high-risk or illiquid tokens under a Restricted Collateralization Mode. In this configuration, a single collateral asset can be used solely for borrowing that same asset (or with stringent limitations). If a token’s oracle data is easily influenced, restricting its usage lessens the threat of wide-scale defaults caused by sudden or artificial price swings.

Enhanced Collateral Efficiency

For assets with closely correlated price movements (for instance, well-known stablecoins), Mutuum offers an Enhanced Collateral Efficiency (ECE) feature. ECE grants elevated borrowing limits when both the borrowed and collateralized asset belong to the same correlated group. As a result, participants benefit from improved capital efficiency while containing systemic risk. Only tokens demonstrating consistent pegs or near-identical market behavior typically qualify for ECE.

Loan-to-Value (LTV)

The Loan-to-Value ratio caps how much a participant may borrow relative to the value of their collateral. For example, at 75% LTV, a user pledging 1 ETH worth of collateral can borrow up to 0.75 ETH worth of another token. The effective LTV of an open position fluctuates over time in tandem with asset prices.

Liquidation Trigger

The liquidation trigger refers to the threshold at which a debt becomes undercollateralized. If a position’s borrowed amount surpasses this threshold (e.g., 70% of collateral value), Mutuum deems the loan unsafe. Liquidators may then acquire the collateral at a discount to stabilize the position and avert further losses for the protocol.

Liquidation Penalty

Once a position enters liquidation, a liquidation penalty (equivalent to a liquidation bonus to liquidators) applies. A portion of this surcharge may be redirected to the protocol’s treasury, functioning as compensation for risk. The allocation factor determines how much of the surcharge is assigned to the treasury versus what is captured by liquidators, balancing incentives for rapid liquidation with the protocol’s long-term solvency.

Reserve Factor

A reserve factor collects a fraction of borrower interest through Mutuum’s reserve factor. This aggregated pool offsets potential defaults and extreme market events. Tokens perceived as more stable often carry a smaller reserve factor, while riskier or more volatile assets are assigned higher ones to account for the added uncertainty.