Risk Models: Health factor or Time-based
Kyoko employs two key risk variables – time-based liquidation and health score liquidation – to construct an effective and diversified risk evaluation mechanism that minimizes lending risk exposure.
Health Factor Liquidation Model could be applied to all kinds of pools.
The health factor is the numeric representation of the safety of your deposited NFT against the borrowed ETH and its underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario.
The health factor depends on the liquidation threshold of your collateral against the value of your borrowed funds.
It will occur when a borrower's health factor goes below 1 due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other. This collateral vs loan value ratio is shown in the health factor.
In a liquidation, up to 100% of a borrower's NFTs asset debt could be liquidated by liquidators, so after a liquidation that amount liquidated from debt is repaid.
How can I avoid getting liquidated?
To avoid liquidation you can raise your health factor by depositing more collateral assets or repaying part of your loan. By default, repayments increase your health factor more than deposits. Also, it's important to monitor your health factor and keep it high to avoid a liquidation. Keeping your health factor over 2, for example, gives you more of a margin to avoid a liquidation.
You should be mindful of the NFTs price fluctuations due to market conditions and how it might affect your healthfactor. Since only ETH could be the borrowing asset, and the oracle machine will use ETH as unit of account. So the price fluctuations of ETH won't affects your healthfactor.
What happens when my health factor is reduced?
Depending on the value fluctuation of your deposited NFTs, the health factor will increase or decrease. If your health factor increases, it will improve your borrow position by making the liquidation threshold more unlikely to be reached. In the case that the value of your collateralised NFTs against the borrowed ETH assets decreases instead, the health factor is also reduced, causing the risk of liquidation to increase.
The Time-based Liquidation model could be applied to all kinds of pools.
There will be no liquidation during the lending period. Liquidation is based upon time, not price. In the instance of default, NFTs will be sent to an auction for liquidation.