Leverage thresholds

When a pool's proportion is too high the nToken account will lend to that pool instead of providing liquidity.

Liquidity providing risks

When a liquidity provider mints nToken he is effectively minting liquidity tokens in multiple pools of a single currency.

The only way liquidity tokens can lose money over their whole maturity is by providing liquidity and subsequently getting short fCash (holding a borrowing position). In exchange for selling fCash liquidity tokens receive cTokens. If the implied interest rate at which liquidity tokens borrow fCash is greater than the realized cToken lending rate, liquidity tokens will lose money. Thus, if nToken accounts mint liquidity tokens at high leverage ratios they expose themselves to potentially large losses.

Mitigating liquidity providing risks

In order to ensure that an nToken account does not become undercollateralized by providing liquidity to individual liquidity pools at leverage ratios that are too high, the protocol enforces leverage thresholds. Leverage thresholds aim to protect nToken accounts against possible large declines in their value.

These thresholds dictate the maximum proportion at which the nToken account can provide liquidity to each liquidity pool. Consequently, leverage thresholds set the maximum interest rates at which liquidity providers can mint liquidity tokens.

If during the course of minting nTokens, a liquidity pool’s proportion is greater than its leverage threshold, the nToken will lend to that liquidity pool instead of providing liquidity. Lending allows the nToken to capitalize the liquidity pool and lower its proportion.

Learn more about leverage thresholds here.