Safety Rules and Regulations for Ensuring Platform Integrity
Protocol Safety Measures are a critical aspect of our protocol. We have implemented robust mechanisms to ensure the safety and stability of our platform. This includes the Emergency Termination Procedure and the Circuit Breaker.
Mark to Market is a standard accounting practice adopted at Secured Finance, which entails recording the fair value of assets and liabilities, thereby providing a realistic appraisal of the financial health and the risk profile of positions on our platform. This practice is indispensable for maintaining transparency and accuracy in financial reporting, which in turn fosters trust and confidence among our users. The Mark to Market mechanism also plays a pivotal role in ensuring that the pricing of assets is aligned with the current market conditions, which is vital for effective risk management.
The Circuit Breaker is a protective mechanism used in the bond market to prevent excessive price movements and maintain stability. It is an automatic mechanism that temporarily suspends trading if there is a sudden and significant price movement. The Circuit Breaker is triggered when the price of bonds rises or falls beyond a certain pre-determined limit during one block.
The Minimum Collateral mechanism is a crucial safeguard designed to ensure that every position on our platform is sufficiently backed by collateral. This practice minimizes the risk of financial loss, both to the individual trader and the broader market, especially in volatile market conditions. By stipulating a minimum collateral requirement, we create a buffer against adverse market fluctuations, ensuring that positions remain solvent and the system resilient.
Emergency termination is a crucial functionality designed to address unforeseen situations that could compromise the integrity of our protocol. This includes scenarios such as hacks or unexpected bugs. When this functionality is executed, all markets are immediately halted, and the protocol becomes non-operational. Users can then only redeem their positions and withdraw their tokens.
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Ensure No Counterparty Credit Risks
In the Secured Finance ecosystem, Liquidators play a crucial role in maintaining the health and stability of the decentralized loan protocol. As a Liquidator, you have the unique opportunity to participate in the liquidation process, ensuring the safety of lenders' funds while potentially earning rewards for your efforts. This section will guide you through how you can become a Liquidator, how the liquidation process works, and the associated risks and rewards.
To become a Liquidator, you don't need to meet any specific criteria. Any user, even if smart contracts, can call the liquidation process.
When a borrower's collateral value falls below the liquidation threshold, their loan becomes susceptible to liquidation. As a Liquidator, your role is to step in and purchase the undercollateralized loan at a discounted price, providing the borrower with an opportunity to recover their position. By liquidating the loan, you allow lenders to recoup their funds and mitigate the risk of defaults.
Being a Liquidator comes with both risks and rewards. The main risk is the potential price volatility of the assets involved in the liquidation process. The value of the collateral may fluctuate rapidly, affecting the profitability of the liquidation.
On the other hand, the rewards for successful liquidations can be lucrative. Liquidators stand to receive a portion of the discounted collateral acquired during the liquidation. This reward serves as an incentive for participants to actively engage in the liquidation process and contribute to the protocol's stability.
Upon executing this process, the liquidator receives the liquidated debt and the collateral plus a 5% fee. However, if the liquidator's collateral coverage exceeds 80% at the end of the process, this liquidation process will fail.
During the liquidation process, these callback functions enable the handling of received collateral by swapping it through external services or unwinding the received debt. The process flow is as follows:
Price Range Limit Mechanism for Market Stability
The Circuit Breaker is a protective mechanism used in the bond market to prevent excessive price movements and maintain stability. This user guide will explain what the Circuit Breaker is and why it is important for bond market participants.
The Circuit Breaker in Bond Market is an automatic mechanism that temporarily suspends trading if there is a sudden and significant price movement. The Circuit Breaker is triggered when the price of bonds rises or falls beyond a certain pre-determined limit. The purpose of the Circuit Breaker is to prevent market participants from trading under extreme market conditions and to protect investors from significant losses due to sudden price fluctuations.
The Circuit Breaker is important for several reasons. First, it helps prevent panic selling or buying during periods of extreme volatility, which can cause prices to move rapidly and unpredictably. This can lead to significant losses for investors who are not able to react quickly enough. Second, it provides market participants with time to assess the situation and make informed decisions about their trades. This helps to prevent knee-jerk reactions that can lead to further market disruption. Finally, the Circuit Breaker promotes overall market stability by reducing the likelihood of extreme price movements and volatility.
By setting the value threshold of the Circuit Breaker to dynamically change based on interest rates or loan duration, you can effectively mitigate the impact of a Flash loan attack. Restricting the price movement within a single block ensures that any potential damage is contained and doesn't escalate rapidly.
How to calculate the Circuit Breaker Price Limit
Our trading platform incorporates a circuit breaker mechanism to regulate price fluctuations within a single block. This feature is applicable to both 'market orders' and 'limit orders,' and operates to ensure that orders are executed within acceptable price ranges. The primary objective of the circuit breaker is to mitigate extreme volatility and maintain equilibrium in our Zero Coupon bond market.
Limitation on Downward Price Movement:
The platform restricts the downward price movement to 5% from the Moving Average of the most recent 5 Reliable Block Prices.
Limitation on Upward Price Movement:
Conversely, upward price movement is capped at 10% from the Moving Average of the last 3 Reliable Block Prices.
Minimum Price Fluctuation:
The market is permitted to move a minimum of 2.00 for downside and 7.00 for topside.
Consider a situation where the last 5 reliable Block Prices are 80.60, 80.40, 80.30, 80.10, and the most recent is 79.60.
Downward Price Limit:
Moving Average of the most recent 5 reliable block prices is
Since movement is limited to 5% to downside, the lowest bound will be
No orders lower than 76.19 will be executed during the next block.
Upward Price Limit:
Moving Average of the most recent 3 reliable block prices is
As topside can move up to 10%, the upper limit will be
Exceptional Case: Minimum Movement:
For instance, if the last 5 reliable block prices were 20.00, 18.00, 16.00, 14.00, and 12.00, the Moving Average would be 16.00. Normally, the downward movement would be limited to 15.20 which is 95% of the 16.00. However, the platform allows for a minimum market movement of 1.00, setting the lower limit at 14.00 (= 16.00 - 2.00).
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A Safety Net for Unforeseen Situations
Emergency global settlement is a critical functionality designed to address unforeseen situations such as hacks or unexpected bugs that could compromise the integrity of our protocol. When this functionality is executed by an admin, all markets are immediately halted, and the protocol becomes non-operational. Subsequently, users can only redeem their positions and withdraw their tokens.
Admin initiates an emergency global settlement.
All markets and the Token Vault are brought to a stop.
Caches of all price feeds are taken for reference.
Users execute redemptions.
The collateral token ratios in the Token Vault are calculated.
Users' total assets and positions in the Present Value (PV) are computed using the price feed caches. Based on the ratios, their assets and positions are replaced with collateral tokens.
Positions of users are reset after the replacement.
Users can then withdraw the replaced tokens after redeeming them.
It's important to note that even users who only have deposits without positions will have their deposits replaced with collateral tokens based on the ratios in the Token Vault.
Let's illustrate the emergency global settlement process with the following example:
Token Vault Holdings:
Total USDC: $100,000
Equivalent ETH Value: $200,000
Ratio: 1 USDC to 2 USD worth of ETH
User's Positions and Deposits:
ETH and FIL Lending Positions (PV value: $10,000)
ETH Deposits (Valued at $5,000)
Total Funds: $15,000
After Emergency Global Settlement:
The user's lending positions and deposits are reset.
The user receives tokens worth $5,000 of USDC and ETH valued at $10,000 as per the replacement.
The user can withdraw $5,000 in USDC and $10,000 worth of ETH from their account.
All audit reports are stored at the links listed below.