Collateral Screening and Parameter Methodology
At Beraborrow, we have developed a thorough methodology to evaluate and approve collateral assets for our protocol. This process ensures that all accepted collateral meets the highest standards of liquidity, stability, and system-wide risk tolerance.
The goal of this methodology is to determine:
Quite simply, which collateral assets we deem acceptable for our protocol
The Minimum Collateralization Ratio (MCR) for each asset.
The Critical Collateralization Ratio (CCR) for the protocol as a whole
Appropriate parameters for borrowing caps, (target) stability pool reserves, and risk-adjusted borrowing rates.
Pre-Screening
Before assets move into in-depth quantitative modeling, we conduct a pre-screening process to filter out those that do not immediately qualify. This stage balances quantitative data with practical heuristics:
Immediate Disqualification: Assets that fail basic criteria are removed from consideration. These include:
Assets with insufficient liquidity (both on-chain and off-chain).
Technical challenges, such as inadequate oracles or a lack of smart contract audits
Heuristic-Based Considerations: In certain cases, assets may provisionally pass the pre-screening stage based on qualitative discussions with their teams. For example:
An asset may demonstrate strong potential if its team has a clear plan to improve liquidity or enhance underlying stability.
Assets associated with well-established teams or protocols may be given conditional approval pending further developments.
This step ensures that we maintain a pragmatic approach without compromising the integrity of our process.
Quantitative Modelling
CCR and MCR Calculation Framework
The MCR and CCR calculations are derived from estimating the maximum loss the system’s collateral portfolio would incur under adverse market scenarios, accounting for individual asset performance, outstanding debt levels, and the stability pool’s ability to absorb shortfalls.. The methodology includes the following steps:
Preparation of Market Scenarios
Historical price, liquidity, and volatility data for each asset (where present) are used to simulate extreme but plausible market events.
Scenarios may include severe price shocks, systemic liquidity squeezes (liquidation cascades), or correlated market downturns.
Running Stress Tests
Stress tests are conducted to measure the impact of these market scenarios on key system parameters.
Simulation Steps
Collateral Valuation: Calculate the USD value of the collateral (after stress events) using historical price and liquidity data.
Debt Valuation: Then, compute the value of the minted stablecoin (NECT), which represents outstanding debt.
Stability Pool Valuation: Measure the current stability pool’s capacity to absorb losses.
Downside Risk of Collateral: Use VaR/CVaR to estimate the value of the collateral under stressed conditions.
Upside Risk of Debt: Apply VaR/CVaR to assess the debt pool's risk under extreme scenarios.
Stability Pool Under Stress: Evaluate the ability of the stability pool to cover shortfalls under adverse conditions.
Shortfall Calculation: Identify insufficient collateral as the difference between stressed collateral and stressed debt values.
Optimal MCR Calculation:
The MCR for each asset is derived by balancing the collateral and debt risks (VaR/CVaR) to ensure a sufficient safety buffer under stress.
System-Wide CCR Calculation:
The CCR is determined by aggregating the individual MCRs across all collateral types while factoring in system-wide parameters (e.g., liquidity tiers and TVL dispersion).
Stress Scenarios and Liquidity Tiers
To ensure the robustness of MCR and CCR values, we simulate multiple stress scenarios across different liquidity tiers:
TVL thresholds of 5M, 10M, 25M, 50M, and 100M are used to assess asset behavior and systemic risk under varying liquidity conditions.
This tiered approach helps evaluate how assets perform under increasing levels of protocol adoption and capital inflow.
System-Wide Risk Management
Borrowing Caps: Debt limits are set for each asset based on its liquidity depth, volatility profile, and MCR values to prevent over-exposure.
Interest Rate Calibration: Interest rates are adjusted to reflect an asset’s risk profile, incentivizing safer borrowing behavior for volatile collateral.
Stability Pool Resilience: The stability pool is stress-tested to ensure it can handle cascading liquidations and absorb losses without compromising system health.
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