Cost control mechanisms

In this section, we explain the mechanisms that control for losses generated by unprofitable liquidations.
A. DeFi Credit Score
The DeFi Credit Score is a numeric value (between 0 and 999) that grades the experience of an individual address based on their on-chain borrowing activity.
The Score is constructed from three components:
Score component
Description
Calculation logic & impact
Daily Score Reward
Evaluates borrow usage over the past 120 days on the ARCx platform relative to an “optimal” Borrower archetype and rewards points along a defined Rewards Curve.
Maximum of 8 points per day (assuming Borrower has “optimal” borrow usage)
Survival Score Reward
Evaluates a Borrower’s ability to avoid liquidations relative to the rest of the market, rewarding points (or subtracting points if liquidated) proportional to the market’s “liquidation density” on a given day
Calculated relative to the rest of the market, accounts for between 0 and 300 points
Liquidation Penalty
Subtracts a fixed number of points for every day and vault in which a the Borrower is liquidated.
Penalty of 250 points per liquidation (per vault, per day)
The DeFi Credit Score is used to assign a personalized maximum LTV ratio specific to each Borrower and vault. By mapping the Score to max LTV, ARCx Credit ensures that only the best Borrowers are offered the highest capital efficiency on the platform.
B. Vault design
ARCx Credit has implemented a three-tiered vault design, with each collateral asset having three distinct vault options distinguished by the range of max LTVs offered, the minimum Credit Score required to access the vault, and the maximum credit limit a Borrower can access (regardless of their deposited collateral).
i. Max LTV ranges
Each collateral type has three associated vaults, named “A”, “B” and “C”.
The “A” vault is available to every Borrower, and the range of max LTV values are set conservatively. For example, WETH-A offers between 80% and 90% max LTV, where a Score of 0 = 80%, and a Score of 999 = 90%.
The “B” and “C” vaults offer comparatively higher max LTV values. For example, the WETH-B vault offers up to 95% LTV, and WETH-C up to 100% LTV.
ii. Score Threshold
The Score Threshold gates access to higher-tier vaults which provide the greatest capital efficiency on ARCx Credit. For example, the most advanced vault (e.g. WETH-C) requires a minimum Credit Score of 750 to access. Should a Borrower gain access to a vault, but subsequently lose it (e.g. because they were liquidated and their Score fell below the threshold), then the Borrower will be unable to continue borrowing on that vault.
iii. Dynamic credit limit
To minimize the likelihood of unprofitable liquidations, ARCx Credit imposes a credit limit on higher tiered vaults, limiting the amount which can be borrowed, regardless of how much collateral is deposited.
The key concept of the dynamic credit limit is that the amount of debt ARCx Credit is willing to extend to the Borrower depends on the amount of debt they have previously taken out. In other words, a Borrower must prove that they can be trusted with larger debt levels before being extended higher and higher credit limits. For example, if a Borrower utilizes the entirety of the limit in WETH-A, then their limit in WETH-B will be significantly higher than a Borrower who only borrows $1 in WETH-A.
iv. How this appears on the product
To illustrate how these cost control mechanisms work in practice, we provide two screenshots of the product.
The first screenshot below shows the borrow vaults available for WETH collateral. In this example, the user has access to WETH-A and WETH-B, but not WETH-C. This is because their DeFi Credit Score is lower than the “Score threshold” specified in the table.
Borrow vaults table showing the score threshold and maximum LTV ratio offered for each vault
The second screenshot below shows the vault action page for WETH-C. In this example, the user does not have the ability to borrow because their DeFi Credit Score is below the Score threshold. Additionally, their credit limit on the vault is $0, which is based on both the collateral deposited into the vault, and the vault credit limit (whichever is lower).
Borrow action page for a specific vault, showing the available credit that is available to borrow.
C. Self-managed liquidations
To ensure that at-risk collateral is sold as soon as is required, ARCx Credit has also deployed its own liquidation engine (instead of solely relying on third party liquidation bots). With our own liquidation engine, we do not need to offer compelling liquidation discounts to incentivize third parties to liquidate, and we can ensure collateral is sold as soon as it is required to be sold. This mechanism safeguards us against the risk of liquidation-sourced toxic debt.
By managing our own liquidations, all revenue generated from the liquidation is kept by the protocol and can be fed back into the supply pool to recover losses due to toxic debt. Reliance on external liquidators has the benefit of security in times of significant volatility, however it also syphons revenue from the protocol to pay the liquidators. This loss of revenue actually aggravates the potential for toxic debt and the higher the liquidation discount, the lower the LTV threshold is for toxic debt to be left in the system.
Inflows and outflows
Profit modeling
Last modified 17d ago
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Outline
A. DeFi Credit Score
B. Vault design
C. Self-managed liquidations