Free Collateral Calculation
The free collateral calculation calculation is a two part process.
- 1.Collect local currency collateral surplus/requirement figures for each supported currency
- 2.Aggregate local currency collateral figures into one ETH-denominated free collateral figure
An account has three possible types of assets per currency: cash, fCash, and Liquidity Tokens. Calculating local currency collateral figures requires converting the value of these assets to a common denominator - cash - and then summing them together. Here is a step by step walk-through of this process.
Liquidity tokens are freely exchangeable for their constituent cash and fCash. The first step in this calculation is to aggregate these claims with the account's cash and fCash holdings.
Liquidity Tokens are risk assets because their net value can decrease. To account for this risk, we apply a haircut to the claims on cash and fCash derived from liquidity tokens for the purposes of calculating their value as collateral. The current liquidity token haircut is 20%.
Add the liquidity token claims on cash and fCash to the account's cash balance and fCash ladder.
We take a conservative approach to valuing fCash as collateral. We do not currently refer to Notional's on-chain liquidity pools for market prices of fCash - instead we apply a significant haircut to positive fCash balances and value negative fCash balances at their full face value. We may choose to upgrade our risk framework to incorporate market prices in the future after evaluating the risks of doing so.
We value positive fCash at a punitive implied annual interest rate that we are confident will be significantly less than its market value. Currently we value fCash at an implied annual interest rate of 50%. Additionally, we cap the collateral value of fCash at 95% of face value.
Once we have local currency collateral values for each supported currency we aggregate them into a single ETH-denominated free collateral figure.
Notional allows users to hold collateral in one currency against debts in another currency. This introduces exchange rate risk. To account for this risk, we add a buffer to any net debt position in a currency when we convert it to ETH. Currently this buffer is 140%.