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Vault health
It is important for borrowers to monitor their vault health conditions. Vault health mainly depends on the value of the locked collateral and its overall debt.
Collateral value is calculated as a sum of the current valuations of deposited LP positions, see Position valuation (technical) for more details. It's important to note specific collateral type may be subject to rapid changes with market movements.
Overall debt slowly increases over time, targeting a configured annual stability fee (currently set at 1% per annum).
Vault health factor is typically expressed in the % format, and calculated as:
Where:
- - collateral liquidation threshold, which is fraction of total locked collateral value
- - vault current debt
The higher the health factor is, the more safety margin you have, and less likely your vault will be subject to liquidation.
As you actively manage your vault, the protocol will not allow your vault health factor to go lower than a predetermined minimal theshold:
Where:
- - collateral liquidation threshold
- - vault max borrow amount
BOB CDP uses a different approach of calculating health factors compared to other lending markets. To reduce confusion, here is high-level comparison:
Protocol | BOB CDP | MakerDAO | MAI | AAVE | Compound |
|---|---|---|---|---|---|
Scale | 1% ... >1,000% | 1% ... >1,000% | 1% ... >1,000% | 0.01 ... >10 | 100% ... 1% (inverted) |
Healthy range | >100% | >130...350% | >110...150% | >1.00 | <70...90% |
Liquidation HF | 100% | 130...350% | 110..150% | 1.00 | 70...90% |
Min HF after borrow | 110%...130% | 130...350% | 110..150% | 1.03-1.20 | 65...83% |
In contrast to other protocols, the health factor is calculated based on the liquidation threshold, rather than the collateral amount. A 150% health factor in BOB CDP is not the same as a 150% collateralization ratio in MakerDAO and other protocols.
- 1.Bob deposits 10,000$ worth of collateral into a newly created vault.
- 2.Since the vault debt is 0 and there is no risk of liquidation, HF is equal to.
- 3.is calculated using a collateral liquidation factor of 70%, and is set to 7,000 BOB.
- 4.is calculated using a max borrow factor of 60%, and is set to 6,000 BOB, which is the max amount available to borrow given the current collateral condition.
- 5.Bob mints 50% of available debt - 3,000 BOB.
- 6.Bob's vault HF is now equal to 7,000 BOB / 3,000 BOB = 233%.
- 7.Collateral price drops to 9,000$.
- 8.Bob's vault HF is now equal to 6,300 BOB / 3,000 BOB = 210%.
- 9.Bob mints remaining available debt - 2,400 BOB, given thatis 5,400 BOB.
- 10.Bob's vault HF is now equal to 117%.
- 11.Collateral price drops to 7,500$.
- 12.Bob's vault HF is now equal to 97%, making his vault subject to liquidation.
Conditions that bring a vault closer to liquidation:
- minting of new debt
- reducing vault collateral
- collateral value market value depreciation
Actions that bring vault further from liquidation:
- active debt repayment
- increasing vault collateral (can be done in the Uniswap UI)
- depositing additional collateral
- collateral value market appreciation
Borrowers are responsible for leaving necessary safety margins in their vaults, regularly monitoring their vault condition to avoid liquidations, and acting accordingly whenever necessary.
In-range positions on Uniswap earn LP fees, which positively impact locked collateral value. With absence of big market movements, earned LP fees are likely to greatly exceed paid stability fees, resulting in a vault become healthier on its own, over time.
A liquidation can be automatically triggered and executed by liquidators once the health factor drops below 100%, meaning the total vault debt exceeded the collateral liquidation threshold:
The valuation of particular LP positions depends on the asset pair used in that particular LP and its price movements. Generally, it can be assumed that volatility of LP tokens is strictly limited by the volatility of individual assets comprising that LP position.
Thus, if the ETH price drops by 10%, the price of any WETH/BOB LP position, regardless of its range, won't drop by more than 10%. In a more realistic scenario, however, when the position stays in-range, the price drop in the valuation of the LP position can be significantly lower. In practice, this usually means that well-ranged WETH/BOB LP collateral (or similar) is safer and "more conservative" then pure WETH (or similar) collateral, thus allowing higher collateral utilization without an increase in liquidation risks.
It's also important to keep in mind that in-range position for liquid pairs actively generate LP fees, which have a strictly positive impact on the position valuation.
Here is an awesome open-source tool for comparing expected performance and valuation of Uniswap V3 LP positions - https://defi-lab.xyz/uniswapv3simulator
Comparison between valuation of 100% ETH HODL and WETH/BOB Uniswap V3 LP strategies.
Last modified 1mo ago