Multi-collateral

By accepting a basket of assets, the system reduces its exposure to the volatility of any single collateral type. This creates a more resilient collateral pool that can withstand price shocks in one asset class.

• Example: A vault backed by both ETH and stablecoins is less likely to face mass liquidations from an isolated ETH price drop.
• Mitigates concentration risk and correlation risk for both the protocol and its users.

Users can leverage their entire portfolio without needing to sell assets, unlocking liquidity from otherwise idle holdings. Different assets have distinct loan-to-value (LTV) ratios and liquidation thresholds based on their risk profiles.

• Example: A user can deposit both volatile ETH (e.g., 150% LTV) and stablecoin USDC (e.g., 95% LTV) to mint more stable debt than with ETH alone.
• Enables sophisticated portfolio management and collateral rebalancing strategies.

New asset types are added through a governance process, where parameters like LTV, stability fees, and liquidation penalties are set by token holders. This involves rigorous risk assessment of the asset's liquidity, price volatility, and oracle reliability.

• Example: MakerDAO's Maker Governance votes on collateral risk parameters for each new collateral type (e.g., wstETH, GUSD).
• Creates a permissionless framework for ecosystem expansion while managing systemic risk.

To manage exposure, each collateral type is assigned a debt ceiling—a maximum amount of synthetic asset (e.g., DAI) that can be minted against it. This acts as a circuit breaker to prevent over-concentration.

• Example: If the debt ceiling for WBTC is $1B, no more DAI can be minted once that limit is reached, forcing use of other collateral.
• Risk isolation ensures a failure in one collateral module does not necessarily cascade to others.

Each collateral type can have a unique stability fee (an annual interest rate) on the debt generated. This fee is a primary tool for monetary policy, adjusting the cost of minting to control supply and peg stability of the synthetic asset.

• Example: MakerDAO may set a higher stability fee for volatile collateral (e.g., ETH) versus stable collateral (e.g., USDC) to incentivize safer backing.
• Fees are typically paid in the system's native governance token or the synthetic asset itself.

A unified liquidation system triggers when a user's collateralization ratio falls below the required threshold for their specific asset mix. The protocol auctions off the undercollateralized assets to cover the debt.

• Example: In a collateral auction, keepers bid for seized ETH and WBTC to repay the vault's DAI debt.
• Different liquidation penalties and auction durations can be set per collateral type based on its liquidity profile.

The core technical lever in multi-collateral systems. Each accepted asset has specific, governance-adjusted parameters that define its role and risk profile within the protocol.

• Loan-to-Value (LTV) Ratio: The maximum borrowing power against a collateral asset (e.g., 75% for ETH, 60% for wBTC).
• Liquidation Threshold: The collateral value at which a position becomes eligible for liquidation.
• Debt Ceiling: A maximum cap on the total debt that can be minted against a specific collateral type, limiting concentration risk.
• Stability Fee / Interest Rate: The cost to borrow, which can be adjusted per asset to manage demand and risk.

A sharp decline in the price of a widely-used collateral asset can trigger mass liquidations, creating a feedback loop. This selling pressure can further depress the asset's price, causing more positions to become undercollateralized. The risk is amplified when multiple vaults rely on the same volatile asset. Protocols mitigate this with circuit breakers, gradual price oracles, and diversified collateral baskets.

The integrity of a multi-collateral system depends entirely on accurate price oracles. An attacker could manipulate the price feed for a less-liquid collateral asset on a decentralized exchange (DEX) to:

• Artificially inflate its value to mint excessive debt.
• Trigger unjustified liquidations on healthy positions. Protocols defend against this by using time-weighted average prices (TWAPs), aggregating data from multiple sources, and implementing circuit breakers for outlier data.

A core assumption is that collateral assets are not perfectly correlated. Risk emerges when supposedly diverse assets (e.g., wrapped assets, stablecoins, liquid staking tokens) move in tandem during a market crisis. A stablecoin depeg is a critical event where its value drops below $1, rapidly eroding the backing for issued debt. Systems must model tail-risk correlations and may apply higher liquidation penalties or haircuts to correlated asset pairs.

Managing a diverse collateral portfolio requires constant parameter tuning, governed by DAO vote. Key parameters include:

• Collateral Factor / Debt Ceiling: The maximum debt issuable against an asset.
• Liquidation Threshold: The health factor level that triggers liquidation.
• Stability Fee: The interest rate on borrowed assets. Incorrect settings can make the system vulnerable to attacks or render it inefficient. This introduces governance attack risk where an attacker gains voting power to set malicious parameters.

Each new collateral type adds a new integration risk. The protocol's smart contracts must securely interact with the token's contract, which may have non-standard behavior (e.g., fee-on-transfer, rebasing). A bug in one collateral adapter can compromise the entire system. Furthermore, reliance on cross-chain bridges for collateral introduces bridge exploit risk, where collateral could be minted fraudulently or stolen on another chain.

Large multi-collateral protocols like MakerDAO and Aave become systemically important. A failure or exploit in one can cause contagion across DeFi, as the same assets are used as collateral elsewhere. This creates interconnectedness risk, where liquidations in one protocol drain liquidity and impact prices for assets used in others. Stress testing and debt ceiling management are crucial to limit the protocol's footprint and potential spillover effects.

The collateralization ratio (CR) is the key risk metric in a multi-collateral system, representing the value of a user's deposited assets relative to their borrowed debt. It is calculated as (Value of Collateral / Value of Debt) * 100%.

• A minimum collateralization ratio is enforced by the protocol; falling below it triggers liquidation.
• A higher CR provides a larger safety buffer against market volatility.
• Different asset types (e.g., ETH vs. a stablecoin) may have unique minimum CR requirements based on their risk profile.

A Collateralized Debt Position (CDP) or Vault is the fundamental user-facing construct. It is a smart contract that holds a user's locked collateral and manages the associated minted debt (e.g., DAI).

• Each position is isolated, with its own collateralization ratio.
• Users interact with their vault to add/remove collateral or generate/repay debt.
• The protocol can programmatically liquidate a vault if its health factor falls below the required threshold.

The stability fee is an annualized interest rate charged on debt generated against collateral in a multi-collateral system (e.g., the variable interest rate on DAI).

• It is typically denoted as an APR and accrues continuously.
• Fees are often paid in the system's native stablecoin and may be used to buy and burn governance tokens or fund the protocol treasury.
• Governance token holders often vote to adjust stability fees for different collateral types as a monetary policy tool.

Liquidation is the enforced, automated process of selling a user's collateral at a discount to cover their undercollateralized debt. It protects the protocol from insolvency.

• Triggered when a vault's collateralization ratio falls below the liquidation ratio.
• Liquidators are incentivized with a liquidation penalty (a bonus from the collateral sale).
• Mechanisms include Dutch auctions (e.g., MakerDAO) or fixed discount liquidation pools to manage market impact.

A debt ceiling is a protocol-enforced limit on the total amount of debt that can be minted against a specific type of collateral asset.

• It is a critical risk parameter set by governance to limit systemic exposure to any single asset.
• Once a ceiling is reached, no new debt can be created using that collateral until existing debt is repaid.
• This parameter allows for the controlled, risk-weighted scaling of a multi-collateral system.

A decentralized oracle provides the essential price feeds that determine the real-time value of all collateral assets in the system.

• Accurate, tamper-resistant price data is non-negotiable for calculating collateralization ratios and triggering liquidations.
• Systems often use multiple oracles (e.g., MakerDAO's Medianizer) and oracle security modules (OSM) to introduce delay and prevent flash loan exploits.
• Oracle failure or manipulation is a primary systemic risk for any multi-collateral protocol.