Risk Parameters

Majority of the parameters impacting liquidity and default risk will be set by the azRISK team. The azRISK team will have these powers delegated to them by governance, albeit in initial stages the core team will be responsible for setting these parameters.

Target Utilisation: Derived based on assessing demand/supply for Murabaha as well as factors such as max wallet deposit, average withdrawal time, etc. Derived using statistical inference and machine learning on historical data.

Market Rate: Derived based on continuous market analysis of other ‘fixed duration fixed rate’ options to achieve competitive parity while ensuring the rate is reflective of demand/supply dynamics of the pools.

MinMurabahaRate: The lowest Murabaha Fee charged by the pool.

UpperMurabahaBound: Derived quantitatively using statistical inference/machine learning on historical data market analysis and qualitatively by assessing other DeFi money market curves to ensure rates are reflective of demand/supply.

Profit_Release_Days: used to ensure PPS doesn't increase abruptly from early repayments. Profit from early repayments is locked and released over some duration. In times of high utilisation the duration may be shorter.

Max_LTV: A function of collateral volatility and other Market related parameters.

Liquidation_Threshold: Derived based on the buffer needed to ensure that liquidation is possible and profitable. A function of volatility, on-chain collateral liquidity and price impact.

Liquidation_Penalty: The penalty charged on collateral above the debt value. A function of of on-chain collateral liquidity and price impact.

Min_Murabaha_Amount : The minimum debt that is required in order to execute Murabaha. A metric that is predominantly a function of Gas Costs. To low of a requirement and the gas cost may outweigh any liquidation incentive/penalty making liquidations unfeasible.

Min_Collateral : This is the minimum that needs to be deposited in collateral and is a function of the Min_Murabaha_Amount: (1 / Users Max_LTV) * Min_Murabaha_Amount

If the user already has existing collateral and they wish to top up, any amount of collateral can be added to existing collateral to lower LTV, However, any new collateral added/toped up will need to meet the min_collateral requirement for that asset.

Max_token_Murabaha: This is the maximum permissible debt for a specific token within the protocol. It is used mitigate liquidity issues and high utilisation as well as reducing the risk of liquidity cascades due to large debts being liquidated. The limit is determined based on the average deposit size in the corresponding pool and the available on-chain liquidity. Albeit the price impact dynamics of Murabaha act as natural debt cap.

MaxTokenCap: This limit ensures that the total token collateral, including any new additions, doesn't surpass a set value. It's a mechanism to control the protocol's exposure to various assets and prevent undesirable liquidation events.

Time based Liquidation Buffer: Ensures there is ample time for expired liquidations to be settled without distortion of the PPS.