Leveraging $QD
Last updated
Last updated
Leveraging the QuantDAO token can be achieved through paying special attention to the amount a user borrows while considering the underlying asset's health. Users must be extraordinarily vigilant in monitoring their positions, however can be easily maintained with responsible usage. An example,
A DAO portfolio asset is collateralized, valued at $50,000
User 1 collateralizes an amount of $QD with a total of $10,000 of market value
2000 DAI is borrowed by the user
The underlying asset's ratio is now 2,500% ($50,000 / $2,000), whereas User 1's $QD ratio is safely at 500%. However, another user opens another position with $5000 of $QD, borrowing a total of 2000 DAI, putting them at immediate risk of liquidation.
The new underlying asset collateralization ratio is 1,250% ($50,000 / $4,000), and each borrower's sub-ratio is 500% and 250%, respectively.
User 1; $10,000 / $2,000
User 2; $5,000 / $2,000
If the underlying collateralized drops in value to $10,000, with a total borrowed of $4,000, the new collateralization ratio is now 250%, in which both users are technically safe from liquidation. However, below we consider the effects of the underlying asset value dropping to $9,999, creating a collateralization ratio just below threshold at 249.98% -- liquidations now begin.
In order to satisfy the health of the CDP, User 2's $5,000 balance is now automatically managed to return stability to other users' borrowing conditions,
$2,000 of User 2's $QD is sold at market to repay the underlying asset
The underlying asset ratio is now 499.95%
User 2's position is now closed, with $3,000 of $QD available for redemption, less fees.
The purpose of liquidity injection is specifically to help safeguard from potential cascading liquidations, where each liquidation helps buffer the next from price spiraling.
Collateralization is inherently risky, as the underlying asset may be indirectly associated with the market price of $QD. Additionally, other users' participation directly affects your own position. Thus, users are encouraged to use extreme caution.
If the DAO finds it in their best interest to close its position, end users are relatively ill-affected if not attentive to their position and end goals. Using the example above for User 1, if the DAO closes its underlying position the total collateral minus borrowed is claimable (in this case, $8,000 of $QD).
The underlying asset is afterwards returned to the DAO portfolio, where negative market value effects from LP generation may be alleviated by standard asset sale and buyback.
