Protocol Parameters
The BENQI Core Team adjusts five key parameters to ensure stability and maintain liquidity across the platform. Over time, this will be increasingly decentralized.
The five parameters include:
Collateral Factor: How much a user can borrow against a specific asset. A higher collateral factor allows users to borrow more, but also increases liquidation risk.
For example, if AVAX has a collateral factor of 40%, and AVAX is priced at $100, the maximum amount that can be borrowed is $40 in other assets. A higher collateral factor means more can be borrowed but increases the liquidation risk.
Reserve Factor: The percentage of interest paid by borrowers that's kept by BENQI and allocated to the protocol's reserves for financial sustainability purposes. This reserve ensures that the protocol can remain stable and resilient in varying market conditions.
For example, with a reserve factor of 20%, 20% of the interest paid by borrowers is collected by the protocol, helping to maintain liquidity buffers and safeguard against potential liquidity shortages or market volatility.
Close Factor: The maximum amount to be liquidated in a single transaction.
For example, with a 50% Close Factor, up to 50% of a liquidatable account's debt can be liquidated in one transaction. If an account had $1,000 in debt that became eligible for liquidation, a liquidator could liquidate up to $500 in one go.
Liquidation Incentive: The reward provided to liquidators for closing under-collateralized positions and ensuring the protocol's sustainability.
For instance, a 10% liquidation incentive means liquidators receive an additional 10% of the borrower's collateral as compensation for executing the liquidation. If a borrower is liquidated with $100 worth of collateral and the liquidation incentive is 10%, the liquidator would receive $110 in return for liquidating the position.
Interest Rate Models: BENQI’s interest rates are based on the utilization rate of each asset market, which refers to the ratio of total assets borrowed to total assets supplied. As utilization rates increase (i.e., more assets are borrowed), interest rates rise, incentivizing others to supply the asset while discouraging further borrowing to maintain liquidity. Conversely, when utilization is low, interest rates decrease to encourage borrowing.
BENQI currently uses the Jump Rate Model, which is more efficient at incentivizing liquidity at higher utilization rate, as illustrated in the following chart:
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