Infinity's risk management system is designed at a macro level to balance Infinity's Assets vs Liabilities. On the micro-level, it is designed to ensure that each account always has enough collateral to cover its liabilities - which may be borrowings, or even short positions in the future.
The flexibility that comes with the above system is so broad that we are limiting it from Day 1 so as to monitor, and then widen it's scope as we collect more information. We are currently limiting the collateral tokens to USDT, USDC, DAI, ETH, and WBTC, their deposit-like derivatives, e.g. Aave and Compound tokens, and more complex tokens such as LP tokens.
In managing assets & liabilities on a micro level, we need to evaluate the volatility of your assets vs the volatility of your liabilities. One of the key inputs to understanding this is the correlation. That is, the risk and correlation of managing a portfolio of ETH assets vs USDT liabilities, is very different from a portfolio of USDT assets and USDC liabilities.
Following are the key risk parameters used in each of the collateral accounts.
Foundational to the collateral management system is the concept of a Loan-to-Value or 'LTV'. This defines the maximum amount one can borrow vis-a-vis some specified collateral and is expressed as a percentage, e.g. 75% of Par. This percentage is multiplied by the Asset Values and enables us to 'account' for volatility and liquidity risks in the event that we need to sell some of your assets. Values closer to 100% indicate a very liquid, deep market, with nominal or unlikely gap/credit risk. Values closer to 0% indicate very illiquid markets, with little to no buyers.
To compare the Assets with Liabilities, we first account for the LTVs above using what's called Risk-Adjusted Assets, where Asset Values are calculated in USD equivalent.
For each wallet, we compute the risk-adjusted assets which is simply the weighted average of the Asset Values multiplied by their respective LTVs:
This enables us to reduce the Assets vs Liabilities term, to Risk-Adjusted Asset vs Liabilities which encompasses the handling of market risks.
A Health Score is determined for each wallet. When the Health Score < 100%, then the assets may be at risk of liquidation to maintain solvency.