⚡Risk Management

The Satoshi Protocol employs a comprehensive risk management framework to ensure system stability and security. This framework includes a Two-tier Liquidation system that provides users an opportunity to rectify their positions before full liquidation, inspired by Aave’s approach. Instant & Permissionless Liquidation allows any user to initiate liquidations without prior approval, ensuring prompt handling of undercollateralized positions. Overcollateralization requires users to deposit more collateral than the value of their debt, tailored to different asset risk profiles, such as varying interest rates and LTV ratios. The Stability Pool Mechanism offers liquidity for settling debts from liquidated positions, using $satUSD and flash loans to maintain stability. Recovery Mode is activated when the Total Collateral Ratio (TCR) falls below 150%, enforcing stricter rules to restore system health. Flash Loan Liquidation provides immediate liquidity for liquidations, enhancing efficiency. Isolated Risk Control to customize parameters of risk management for each asset type, like LST/LRT, to address specific risks and ensure protocol resilience.

Isolated Risk Control

Isolated Risk Control differentiated parameters are tailored settings for various asset types within the Satoshi Protocol to address their unique risk profiles. This approach ensures that the protocol remains secure and adaptable to different market conditions by customizing the interest rate, Loan-to-Value (LTV) ratio, and other risk parameters for each asset type. By differentiating these parameters, the protocol can better manage risks associated with volatile assets and provide a more stable and secure environment for users. Different collateral types, such as LST, might have unique parameters due to their characteristics and associated risks, such as their origin from other protocols or their stability compared to primary assets like BTC.

Example

• Scenario The Satoshi Protocol supports multiple asset types, including BTC and LST.

• Parameter Setting

  • Native BTC: Given its lower volatility, BTC has a higher LTV ratio and a lower collateral requirement to mitigate risk. For example, BTC might have an LTV of 90.91% and a Minimum Collateral Ratio (MCR) of 110%.

  • Allcoins: Which originates from another protocol (ex: LST/LRT), may have additional risk considerations. Due to its integration with other systems, it might be perceived as less stable than primary BTC. Thus, Token might have a lower LTV of 65%, a higher MCR of 160%, and a slightly higher interest rate to account for the additional risk.

• Monitoring and Adjustment The protocol continuously monitors the performance and volatility of each asset type. If market conditions change, the parameters for each asset can be adjusted accordingly. For instance, if the volatility of token increases due to changes in the underlying protocol, the Satoshi Protocol might further lower its LTV ratio and increase the MCR to enhance security.

• Implementation

  • Risk Profile Analysis: Regular analysis of market trends and asset performance.

  • Parameter Updates: Adjusting interest rates, LTV ratios, and collateral requirements based on real-time data.

• Security This differentiated approach ensures that each asset type is managed according to its specific risk profile, maintaining the overall security and stability of the protocol. By setting distinct parameters for assets, the protocol can mitigate specific risks associated with these unique collateral types, ensuring a robust and resilient system.

Instant & Permissionless Liquidation

Instant and permissionless liquidation is a key feature of the Satoshi Protocol, designed to address under-collateralized positions swiftly and efficiently. Unlike many other CDP or lending protocols that rely on auction models, which can be time-consuming and inefficient, the Satoshi Protocol allows any user to initiate the liquidation process without prior approval. This immediacy is crucial as it ensures that risky positions are dealt with promptly, preventing potential bad debt and protecting the protocol from market volatility.

When a user’s collateral falls below the 110% threshold, any participant can trigger the liquidation process. This open access system encourages active participation and provides incentives for liquidators, such as a reward percentage of the liquidated collateral and gas fee compensation. By enabling instant liquidation, the Satoshi Protocol avoids the delays associated with auction models, which can exacerbate losses during rapid market declines. The protocol’s approach ensures that liquidations are executed quickly, maintaining the integrity and stability of the overall system and mitigating the risk of further price drops impacting the collateral value.

Example

• Scenario Any user’s collateral falls below the 110% threshold.

• Liquidator Action A participant identifies the under-collateralized position and initiates the liquidation.

• Liquidation Process The participant triggers the protocol, selling the collateral to cover the debt.

• Rewards The participant receives 0.25% of the liquidated collateral and gas compensation.

Over-collateralization

Over-collateralization is a core principle in the Satoshi Protocol, requiring users to deposit more collateral than the value of the debt they wish to incur. This practice ensures the stability and security of the protocol, protecting against market volatility and sudden price drops. Users must maintain a Minimum Collateral Ratio (MCR) of at least 110%, with higher ratios recommended for added safety. The protocol allows different collateral types to have varied borrow rates, Loan-to-Value (LTV) ratios, and other parameters to cater to the specific risk profiles of each asset. This tailored approach ensures that the protocol remains secure and adaptable to different market conditions.

Example

• Scenario User B deposits $2,000 worth of BTC to borrow $1,818.18 in satUSD (Collateral Ratio of 110%).

• Collateral Maintenance To avoid liquidation, User B maintains a buffer, keeping the collateral ratio above 150%.

• Collateral Drop If the BTC value drops, reducing the collateral value to $1,980, the system still ensures the position remains overcollateralized.

• Security This overcollateralization protects the protocol from volatile market conditions, ensuring the stability and reliability of $satUSD.

Stability Pool Mechanism

The Stability Pool (SP) serves as a crucial mechanism within the Satoshi Protocol, designed to preserve the system’s stability by providing liquidity for settling debts from liquidated positions. When a position undergoes liquidation, the SP uses $satUSD to clear the debt and, in return, acquires the collateral from the liquidated position. Contributors to the SP are incentivized through several mechanisms, including collateral gains from liquidations, trigger rewards for initiating liquidations, and token rewards in the form of $OSHI tokens. Additionally, the SP ensures that even in scenarios where it lacks sufficient funds, flash loans can be utilized to facilitate liquidations, maintaining the protocol’s stability.

Example

• Scenario User C contributes $satUSD to the Stability Pool.

• Liquidation Event A position with a collateral ratio below 110% is liquidated. The SP uses $satUSD to settle the debt.

• Collateral Acquisition The SP acquires the liquidated collateral, providing User C with a share of the discounted collateral.

• Rewards User C receives $OSHI tokens and a portion of the collateral as incentives for their contribution.

• Flash Loan Utilization In cases where the SP lacks sufficient funds, a flash loan is used to facilitate the liquidation, ensuring the debt is cleared and stability is maintained.

Recovery Mode

Recovery Mode is a critical safety mechanism within the Satoshi Protocol, designed to safeguard the system’s overall health and stability. It is triggered when the Total Collateral Ratio (TCR) falls below 150%, indicating a potential risk to the system’s stability. During Recovery Mode, specific actions are taken to prevent further decreases in the TCR and to encourage measures that would raise it back above the 150% threshold. These actions include liquidating positions with collateral ratios below 150%, restricting borrowing activities that could further compromise the TCR, and incentivizing borrowing that improves the TCR with a 0% borrowing fee. This mode ensures the protocol remains robust and can recover quickly from potential destabilizing events.

Example

• Scenario The Total Collateral Ratio (TCR) of the Satoshi Protocol below 150%.

• Activation Recovery Mode is triggered, initiating specific rules to restore stability.

• Liquidation Actions Positions with a collateral ratio below 150% are eligible for liquidation to remove riskier positions from the system and increase the TCR.

• Borrowing Restrictions Borrowing activities are restricted to only those that improve existing positions’ collateral ratios or create new positions with a collateral ratio of 150% or higher.

• Incentives for Recovery Despite borrowing restrictions, a 0% borrowing fee is implemented to encourage actions that enhance the TCR, helping to restore normal operations and promote system stability.

Flash Loan Liquidation

Flash loan liquidation allows for instant liquidation of under-collateralized positions using flash loans. This method provides immediate liquidity without requiring upfront capital, ensuring that the protocol can swiftly handle liquidations even in scenarios where the Stability Pool lacks sufficient funds. By leveraging flash loans, the Satoshi Protocol can cover the debt of liquidated positions in a single transaction, which is then repaid within the same block. This approach enhances the efficiency and responsiveness of the liquidation process, maintaining the protocol’s stability and protecting against sudden market fluctuations.

Example

• Scenario User D identifies an undercollateralized position with a collateral ratio below 110%.

• Initiation User D initiates a flash loan to temporarily borrow the funds needed for liquidation.

• Liquidation Process The flash loan is used to cover the position’s debt, and the collateral is sold to repay the borrowed amount within the same transaction.

• Completion User D repays the flash loan instantly and receives the liquidation reward, which includes 0.25% of the liquidated collateral and gas fee compensation.

• Stability Ensured Even when the Stability Pool lacks sufficient funds, the use of flash loans ensures that liquidations can be executed swiftly, maintaining the overall stability of the protocol.