Reserve

Reserves: The Configurable Segments of Liquidity Pools

Within each Udon Finance liquidity pool, a Reserve represents an instance of a specific token. Think of it as a distinct compartment for each asset (like USDC, CHR, or ETH) within the larger pool. Each reserve is meticulously governed by a set of parameters, strategically designed to manage risk and optimize liquidity for that particular token. These parameters can vary across different markets or even within the same Udon pool, allowing the protocol to adapt to various network and market conditions.

Key Reserve Parameters

To ensure the health and efficiency of each reserve, several critical parameters are at play:

• Loan-to-Value (LTV): This parameter defines the maximum amount that can be borrowed relative to the collateral's value. For example, if an asset has a 75% LTV, you can borrow up to 75% of the collateral's value. Crucially, an asset with an LTV of 0% cannot be enabled as collateral. The LTV helps maintain a healthy collateral buffer.

• Liquidation Threshold: The Liquidation Threshold establishes the precise point at which a borrower's position becomes at risk of liquidation. If the value of the borrowed assets, relative to the collateral, crosses this threshold, the position could be automatically liquidated to protect the protocol and its liquidity providers. This is a vital safeguard for the system's stability.

• Borrowing Enabled: This straightforward parameter determines whether the liquidity of a particular reserve is available for borrowing. If "Borrowing Enabled" is set to 'false', users cannot borrow that specific token from the pool.

• Caps (Supply and Borrow): Supply and Borrow Caps set limits on the total amount of a token that can be supplied to or borrowed from a reserve. These caps are indispensable for maintaining overall liquidity, preventing excessive concentration of risk, and safeguarding the protocol from overexposure, especially during highly volatile market conditions.

• Interest Rate Model: Interest rates within Udon's reserves are not static; they adjust dynamically based on the utilization of the liquidity pool for that specific asset. As more liquidity is borrowed (i.e., utilization increases), the interest rates for borrowing rise. This mechanism serves a dual purpose: it incentivizes more suppliers to provide that asset and ensures that sufficient liquidity remains available for withdrawals and other operations. The rates are controlled by parameters that set the base rate and slopes for utilization.

Dynamic Parameters and Adaptability

The parameters for each reserve are not set in stone. They can, and often do, vary between different markets and are designed to change over time as the Udon protocol monitors real-time market conditions and adjusts settings accordingly. This dynamic adaptability is key to optimizing liquidity and managing risk across the entire protocol.

For instance, the same underlying token, like CHR, might have different LTVs or interest rates if Udon were deployed across various Chromia blockchain applications or specific configurations, reflecting distinct market dynamics and risk profiles. These adjustments are made to allow reserves to remain aligned with current market conditions, ensuring the Udon protocol remains robust, efficient, and user-centric.