Risk Management

If a CDP falls below the minimum collateralization ratio, the system auctions off the collateral at a 20% discount to anyone able to cover the CDPs synthetic asset. This liquidation auction mechanism incentivises sophisticated participants to mint - or purchase on the market via NEPRIswap - the required synthetic and redeem the discounted collateral. System solvency relies on the proper functioning of this mechanism over time.

NEPRI TFA segregates risk management. Collateral in one market is only available to that particular market.

The protocol can thus support assets with differing volatility profiles without exposing the entire system to insolvency risk.

If NEPRI TFA took a pooled risk approach instead - where all synthetic assets were issued against a single reserve of stablecoins - then the collateralization ratio would have to be calibrated to the highest volatility asset. This again reduces capital efficiency and creates unnecessary burdens on the system.

In our view, pooled collateral is suboptimal. Why should the collateral requirements be the same between US 30 Year Treasury Bonds and US West Texas Intermediate Oil?

The tradeoff with NEPRI TFA’s segregated approach is that liquidity cannot be aggregated and each synthetic market must independently accrue market depth.