Understanding Risk adjusted TVL

@NotionalFinance uses Collateral Factor and Borrow Factor to determine the Risk-Adjusted LTV ratio which is used to check if an account id eligible for liquidation.

Here is an Image only thread to explain what these factors do ⬇️⬇️

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Case 1:

The debt is equal to the collateral provided by the user

The colored bubbles are the visual interpretation of Debt and Collateral value

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Here is what the Debt and Collateral values look like (shaded portion) after applying the borrow factor and collateral factor.

✂️ Haircuts (collateral factor) reduce the value of net positive assets, while 🔋buffers (buffer factor) increase the value of net negative assets.

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Hereafter applying the factors, the TVL is called Risk-Adjusted TVL. Right now it turns out to be more than 1 which implies this account needs to be liquidated.

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Let us calculate the liquidation point i.e. maximum LTV.

Maximum LTV is reached when the Risk-adjusted TVL is at 1

Here is how it looks:

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Here is what the actual Debt and Collateral values look like after considering the Borrow Facto and the Collateral Factor.

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The Borrow Factor and the Collateral Factor are different for different assets and it is based on the liquidity as well as the volatility of the particular asset.

Haircut = Collateral Factor

Buffer = Borrow Factor

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Here is what the ideal condition looks like:

When the LTV is less than the Maximum LTV