Minting and Burning Mechanisms with LTV Ratio
Minting Mechanism with LTV Ratio Consideration
Collateralization and LTV Ratio: In the Fathom Protocol, users provide collateral to borrow FXD. The Loan-to-Value (LTV) ratio determines the maximum loan amount. This ratio specifies the maximum proportion of the borrowed value relative to the collateral's value.
Example of LTV-Based Minting: For instance, if a user collateralizes $100 worth of collateral asset and the LTV ratio is 65%, the user can borrow up to $65 worth of FXD. This system ensures that the minting of FXD is always in alignment with the value of the collateral based on the predetermined LTV ratio.
Ensuring Balanced Issuance: The LTV ratio is a crucial parameter in smart contracts, ensuring that the issuance of FXD is balanced and proportionate to the underlying collateral. This prevents over-minting and maintains the protocol’s financial stability.
Burning Mechanism and Liquidation Process
Position Closure and FXD Return: When users close their positions, they return the borrowed FXD to the protocol. The smart contracts immediately burn this returned FXD, removing it from circulation.
Liquidation Trigger and Process: If the market value of the collateralized asset falls such that the LTV ratio is breached (i.e., the value of the borrowed FXD exceeds the adjusted permissible limit), a liquidation process may be initiated. This process involves the sale of the collateralized asset to liquidators in exchange for FXD.
FXD Burning Post-Liquidation: The FXD acquired by the liquidator in exchange for the asset is then burned. This step is crucial for offsetting the outstanding debt and maintaining the financial equilibrium of the Fathom Protocol.
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