Collateral Top Ups💜
The liquidation prevention method
The Backd protocol protects registered user's loans from liquidation by executing automated collateral top ups. A collateral top up is the act of depositing addition collateral into a collateralized debt position. When a top up occurs, it increase the health factor of the loan which in turn prevents or deceases liquidation risk. All Backd liquidity providers can open a top up position by registering their LP tokens.
Top ups are personalized to the user. Meaning, users select specific parameters that best match their risk profile or investment strategy. Every time a top up occurs a top up fee is charged to the user. Fees are automatically deducted from the user's Max Allocation.

Reactive Liquidity

Liquidity that is registered for top ups reacts to a user's positions. When a user's loan is safe from liquidation, liquidity is deployed to generate yield. If the loan becomes at risk of liquidation, liquidity is used to execute a collateral top up (prevent liquidation).

Example

In this example a user is borrowing $37,500 of DAI against $50,000 of ETH as collateral on Aave. This is a risky, or highly leveraged, loan with a health factor of 1.066. In order to mitigate liquidation risk, the user makes the following top up registration:
Health factor: 1.05 Increments: $2,500 Max allocation: $10,000.
At some point in time Ethereum drops in value which causes the Aave loan to become less collateralized. This negatively impacts the LTV or collateralization ratio of the loan and decreases the health factor (health factor < 1 = eligible for liquidation).
When the user's loan hits a health factor of 1.05 a Backd keeper immediately reports this to the Backd smart contract which then executes a collateral top up. $2,500 is taken from the Backd user's liquidity (which has been earning yield) and deposited into the user's collateral. This increases the health factor of to 1.103 which prevents possible liquidation and greatly increases the safety level of the loan.
Once registered, collateral top ups are entirely automated for users and will continue to occur (if triggered) until the user unregisters their Backd liquidity or lacks sufficient funds.
This example demonstrates how the Backd protocol can be used to increase leverage. Increasing leverage comes at the cost of higher liquidation risk. The user was able to mitigate liquidation risk and maintain a lower risk health factor by registering his loan on Backd. Additionally, the user was able to decrease the cost of borrowing thanks to Backd's reactive liquidity.

Top Up Fees

Backd collateral top ups are not only a service to users. They also generates profit for the Backd protocol as a whole. When a collateral top up occurs it generates a top up fee (protocol fee). This fee is taken from the user's (who is being toped up) max allocation. Top up fees are split between Backd LPs, Backd governance token holders, and the Backd keeper who reported the top up.
Last modified 3mo ago