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Protocol and token parameters for Fountain Protocol
Each asset of a protocol is assigned its own parameters based on its individual risk profile and the objectives of those who govern the protocol and seek to ensure its solvency through minimal reliance on liquidations.
- Collateral Factor. The maximum that can be borrowed on a particular asset e.g. ROSE collateral factor is 40%, if the price of ROSE is $10, the maximum that can be borrowed is $4 in other assets.
- Reserve Factor. The percentage of the borrower's interest accrues to Fountain Protocol. e.g. reserve factor of 10% means that 10% of the interest paid on the asset is for the protocol.
- Close Factor. The maximum amount that can be liquidated in a single transaction e.g. 50% close factor means that a maximum of 50% of a liquidatable account's borrow can be repaid in a single liquidate transaction.
- Liquidation Incentive. The incentive that is given to liquidators to perform liquidations and keep the protocol solvent e.g. liquidation incentive of 10% means that liquidators will receive an extra 10% of the borrower's collateral for liquidate transactions.
All interest rates in Fountain are determined as a function of a metric known as the utilization rate. The interest rates on Fountain are determined by the utilization rate, which is essentially the percentage of total assets borrowed out against the total asset supplied. A high utilization rate indicates that a lot of borrowing has occurred, while a low ratio indicates the opposite.
Fountain's interest rate models dynamically adjust the interest rates of each asset market depending on the utilization rate. A high ratio would incur higher interest payments from borrowers, and consequently higher interest payments to suppliers, thereby encouraging suppliers to add more assets to the protocol and ensuring healthy levels of available liquidity.