Multi-Collateral Pool

By accepting a basket of assets, the pool's collateral base is not dependent on the price stability of a single token. This mitigates systemic risk from a single asset's volatility. For example, a pool holding ETH, WBTC, and stablecoins is inherently more resilient than one holding only ETH.

Each supported collateral asset has its own set of configurable risk parameters, including:

• Loan-to-Value (LTV) Ratio: The maximum borrowing power against the collateral (e.g., 75% for ETH, 60% for a more volatile altcoin).
• Liquidation Threshold: The price point at which a position becomes eligible for liquidation.
• Liquidation Penalty: The fee charged during a liquidation event. These parameters are set based on the asset's price volatility, liquidity, and oracle reliability.

Users can leverage their entire portfolio without needing to swap assets into a single collateral type. This increases capital efficiency by unlocking borrowing power from otherwise idle or diversified holdings. It also lowers the barrier to entry for borrowers who hold a variety of assets.

The pool's solvency depends on real-time, accurate pricing of all collateral assets. This is managed through decentralized oracle networks (like Chainlink). Each asset's value is continuously fed into the protocol's smart contracts to calculate total collateral value and health factors for every user position.

Despite accepting multiple collateral types, debt is typically issued in a single debt asset (e.g., a stablecoin like DAI or a protocol's native token). This simplifies the debt market and liquidity. The pool manages the cross-collateralization where different assets back the same debt denomination.

Adding a new collateral type is a major governance decision, as it introduces new risks. The process typically involves:

• Risk assessment by community or dedicated teams.
• Smart contract integration and oracle feed setup.
• Governance vote to approve parameters (LTV, thresholds).
• Debt ceilings are often set to limit exposure to any single new asset initially.

By allowing users to collateralize a diverse portfolio of assets, multi-collateral pools unlock more borrowing power from a single deposit. This reduces the need to over-collateralize with a single asset and allows for better utilization of a user's total portfolio value. For example, a user can deposit both ETH and wBTC to back a loan, leveraging the combined value of both assets.

These pools mitigate idiosyncratic risk associated with any single asset. If one collateral asset experiences high volatility or a price drop, the pool's overall health is buffered by the other assets. This creates a more resilient system for lenders and reduces the likelihood of cascading liquidations triggered by a single market event.

Users are not limited to a protocol's native token or a single blue-chip asset. This opens DeFi participation to holders of a wider range of tokens, including LP tokens, staking derivatives (like stETH), and other yield-bearing assets. It enhances composability by allowing these assets to be used as productive collateral elsewhere in the ecosystem.

Protocols can assign specific loan-to-value (LTV) ratios, liquidation thresholds, and interest rates to each accepted collateral type based on its volatility and liquidity. This allows for fine-tuned risk management where stablecoins can have higher LTVs than more volatile altcoins, optimizing both safety and capital efficiency for the pool.

Attracting a broader base of collateral increases the Total Value Locked (TVL) and deepens overall liquidity. This liquidity makes the protocol more attractive to borrowers and lenders, creating a network effect. A larger, more diversified collateral base also contributes to the stability of the protocol's native debt asset (e.g., DAI in MakerDAO).

A core danger is correlation risk, where seemingly diverse collateral assets (e.g., wBTC and ETH) lose value simultaneously during a market downturn. This can cause mass liquidations across the pool, overwhelming liquidation engines and leading to bad debt. Risk models must account for asset covariance, not just individual volatility.

Each asset requires specific risk parameters, creating configuration complexity:

• Loan-to-Value (LTV) Ratio: Maximum borrow amount per collateral type.
• Liquidation Threshold: The health ratio that triggers liquidation.
• Liquidation Penalty: Fee applied during a liquidation event.
• Debt Ceiling: Maximum total debt allowed for that specific collateral. Incorrect parameterization is a major source of protocol insolvency.

Adding or modifying collateral types is typically a governance decision. This introduces risks:

• Malicious proposal risk: Governance attacks to add a worthless or exploitable asset.
• Timelock bypass: If upgrade mechanisms lack sufficient delays.
• Parameter drift: Gradual, risky changes to LTV or thresholds that degrade system safety. Robust governance with veto powers and emergency pauses is critical.

During a liquidation, the seized collateral must be sold to cover the debt. If the collateral asset has low market liquidity (e.g., a long-tail token), liquidators may incur high slippage, leading to bad debt for the protocol. Pools often implement liquidation incentives (bonuses) and may use internal swap mechanisms to manage this.