🏍️ZC Collateral Case Study

Understanding how Zero-Coupon Bonds can be used as collateral and the liquidation process

Overview

This case study demonstrates the practical application of Zero Coupon Bonds (ZC) as collateral within our platform, focusing on the calculation of ZC utilization ratios, the overall collateral utilization ratio, and ZC collateral liquidation. Through detailed examples, we explore how these metrics are calculated and displayed, providing insights into effective collateral management.

How It Works

Leveraging ZC Bonds Without Cash Collateral

Consider User A who holds a ZC bond with a Present Value (PV) of 1,000 USDC. Opting to use this ZC bond as collateral, User A seeks to borrow without pledging any cash collateral. Under our platform's guidelines, they are eligible to borrow up to 80% of the ZC's PV, equating to 800 USDC.

Upon borrowing the 800 USDC, the ZC utilization ratio for User A reaches 80%, reflecting the proportion of the ZC bond's value that has been leveraged. However, the total collateral utilization ratio presents a more comprehensive view of their position.

Calculating Total Collateral Utilization Ratio

The total collateral utilization ratio is calculated by considering both the borrowed amount and the utilized ZC as part of the collateral base. This calculation is crucial for understanding the full scope of collateral engagement on the platform. In this scenario, the formula is applied as follows:

$$\text{Collateral Utilization Ratio} = \frac{\text{Obligation}}{\text{Cash Collateral} + \text{Utilized ZC}}$$

Given that User A's obligation is 800 USDC and the utilized ZC amounts to 1,000 USDC, the presence of the borrowed 800 USDC as part of the collateral (under the Secured Finance Vault) modifies the equation. Thus, the total collateral base is the sum of the ZC's PV and the borrowed cash, totaling 1,800 USDC. The calculation becomes:

$$\text{Collateral Utilization Ratio} = \frac{800}{1,000 + 800} = 44.44\%$$

This results in a collateral utilization ratio of approximately 44.44%, illustrating a more favorable leverage position than indicated by the ZC utilization ratio alone.

Key Parameters

Parameter	Description	Value
Maximum ZC Utilization	Maximum percentage of ZC bond value that can be borrowed	80%
Liquidation Threshold	Utilization ratio at which liquidation is triggered	80%
Liquidation Amount	Maximum portion of obligation that can be liquidated	50%
Liquidation Fee	Additional fee applied to liquidated amount	7% (5% to liquidator, 2% to reserve)
Post-Liquidation Target	Target utilization ratio after liquidation	~70%

Examples

Example 1: Basic ZC Bond Collateralization

User A holds a ZC bond with a Present Value (PV) of 1,000 USDC and wants to borrow without adding cash collateral:

1. User A deposits the ZC bond as collateral

2. Under the 80% maximum utilization rule, User A can borrow up to 800 USDC

3. After borrowing 800 USDC, the ZC utilization ratio is 80% (800/1000)

4. User A can withdraw the 800 USDC to their wallet

5. Both ZC utilization and overall collateral utilization ratios are at 80%

Example 2: Liquidation Scenario

If the price of User A's ZC bond suddenly declines:

1. The liquidation process is triggered when utilization exceeds 80%

2. A liquidator can liquidate up to 50% of User A's obligation (400 USDC)

3. User A loses the liquidated amount plus a 7% fee (400 + 28 = 428 USDC)

4. After liquidation, User A's remaining obligation is 400 USDC

5. The ZC collateral is reduced to 572 USDC (1000 - 428)

6. The post-liquidation ZC utilization ratio becomes 69.93% (400/572)

Example 3: Mixed Collateral Strategy

User B has both ZC bonds and cash collateral:

1. User B deposits a ZC bond worth 2,000 USDC and 1,000 USDC cash

2. User B can borrow up to 2,600 USDC (80% of ZC value + 100% of cash)

3. After borrowing 2,000 USDC:

   • ZC utilization: 80% (1,600/2,000)

   • Cash utilization: 40% (400/1,000)

   • Overall collateral utilization: 66.7% (2,000/3,000)

4. This mixed strategy provides better protection against price fluctuations

5. User B would need a significant price drop to trigger liquidation

Common Questions

What are the advantages of using ZC bonds as collateral?

Using Zero-Coupon Bonds as collateral offers several advantages:

1. Increased Capital Efficiency: Allows users to leverage their ZC bond holdings without selling them

2. Yield Optimization: Users can maintain exposure to fixed-rate returns while accessing liquidity

3. Portfolio Diversification: Enables users to maintain diversified positions across different assets

4. Reduced Opportunity Cost: Provides access to capital without forfeiting future bond returns

5. Strategic Positioning: Allows for complex trading strategies that combine fixed-rate exposure with other market opportunities

What risks should I be aware of when using ZC bonds as collateral?

When using ZC bonds as collateral, be aware of these risks:

1. Price Volatility: ZC bond prices can fluctuate based on market conditions and interest rate changes

2. Liquidation Risk: If utilization ratios exceed thresholds, your position may be partially liquidated

3. Maturity Considerations: As bonds approach maturity, their price sensitivity to interest rate changes decreases

4. Market Liquidity: In times of market stress, ZC bond liquidity may decrease, affecting collateral valuations

5. Correlation Risk: If you borrow assets that are highly correlated with your ZC bond collateral, market downturns could affect both simultaneously

How is the ZC bond value calculated for collateral purposes?

The ZC bond value for collateral is calculated as follows:

1. Present Value Calculation: The system uses the current market price to determine the Present Value (PV)

2. Mark-to-Market Updates: The value is regularly updated based on market prices

3. Haircut Application: A 20% haircut is applied to the PV to determine the maximum borrowing capacity

4. Maturity Consideration: As bonds approach maturity, their value converges toward par (face value)

5. Price Oracle Integration: The system uses decentralized price oracles to ensure accurate valuations

What happens if I want to withdraw my ZC bond collateral?

To withdraw your ZC bond collateral:

1. Utilization Check: The system verifies that your remaining collateral will maintain utilization ratios below thresholds

2. Repayment Requirement: You may need to repay a portion of your borrowed amount to reduce utilization

3. Partial Withdrawal: You can withdraw a portion of your ZC bond collateral if full withdrawal isn't possible

4. Fee Consideration: There are no additional fees for withdrawing collateral

5. Processing Time: Withdrawals are processed on-chain and typically complete within one block

How does the liquidation process differ for ZC bond collateral compared to other collateral types?

The liquidation process for ZC bond collateral:

1. Same Threshold: Uses the same 80% utilization threshold as other collateral types

2. Partial Liquidation: Liquidators can liquidate up to 50% of the obligation in a single liquidation

3. Collateral Valuation: ZC bonds are valued at current market prices during liquidation

4. Liquidation Fee: The same 7% liquidation fee applies (5% to liquidator, 2% to reserve)

5. Post-Liquidation Target: The process aims to bring utilization down to approximately 70%

Related Resources

• ZC Bond Collateral
• Collateralization
• Liquidation Process
• Zero-Coupon Standard