Protocol Mechanics

Interest Rate Models

Fathom Lending employs a dynamic interest rate model that adjusts based on the utilization rate of each asset pool. This model ensures that interest rates are fair and responsive to market conditions, balancing supply and demand for each asset. The key components of the interest rate model are:

  • Base Rate: The minimum interest rate applied when utilization is low.

  • Slope 1: The rate of increase in interest rates as utilization rises from 0% to the optimal utilization point.

  • Optimal Utilization Rate: The target utilization level where the interest rate curve changes its slope.

  • Slope 2: The rate of increase in interest rates as utilization rises above the optimal utilization point.

This tiered model incentivizes both lending and borrowing, ensuring sufficient liquidity and stable interest rates.

Collateral Management

Collateral management is a crucial aspect of the Fathom Lending protocol, ensuring that loans are secure and the system remains stable. Key components of collateral management include:

  • Collateralization Ratio: The required ratio of collateral value to borrowed amount. This ratio ensures that loans are over-collateralized to protect against market volatility.

  • Health Factor: A measure of the safety of a borrower's loan, calculated as the ratio of the value of the collateral to the value of the borrowed assets. A higher health factor indicates a safer loan.

  • Collateral Types: Fathom Lending supports various types of collateral, each with its own collateralization ratio based on its risk profile.

Borrowers must maintain their collateral above the required ratio to avoid liquidation. The protocol continuously monitors the value of the collateral and the borrowed amount to ensure compliance.

Liquidation Process

The liquidation process in Fathom Lending ensures that the protocol remains solvent and that lenders' funds are protected. The key steps in the liquidation process are:

  1. Triggering Liquidation: When a borrower's health factor falls below 1 (i.e., the value of their collateral is insufficient to cover their debt), the liquidation process is triggered.

  2. Liquidation: Liquidators can liquidate the under-collateralized loans at a discount. The system incentivizes liquidators to repay the loan and sell the collateral, restoring the protocol's balance.

  3. Repayment and Collateral Sale: The liquidator repays the borrower's loan and receives the collateral at a discount. This process ensures that the protocol remains solvent and that the liquidator is incentivized to participate.

Liquidations help maintain the stability and solvency of the Fathom Lending protocol, ensuring that lenders' funds are always protected.

Risk Parameters

Fathom Lending employs several risk parameters to ensure the stability and security of the protocol. These parameters are designed to manage risk and protect users from market volatility. Key risk parameters include:

  • Loan-to-Value (LTV) Ratio: The maximum amount a user can borrow relative to the value of their collateral. A lower LTV ratio indicates a more conservative borrowing limit, reducing the risk of liquidation.

  • Liquidation Threshold: The collateral value at which a loan becomes eligible for liquidation. This threshold is set to ensure that loans are adequately collateralized and to protect against sudden market downturns.

  • Liquidation Bonus: An additional incentive for liquidators, provided as a percentage of the collateral value. This bonus ensures that liquidators are adequately rewarded for their efforts in maintaining the protocol's stability.

  • Reserve Factor: A percentage of the interest paid by borrowers that is reserved for the protocol. This reserve acts as a safety buffer to cover potential losses and ensure the long-term sustainability of the protocol.

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