LTV based discounting

Mirai receives higher discounts based on how underwater loans are.

When the value of a borrower's assets falls below the value of the loan, their account is said to be "underwater." In such cases, the Mirai protocol will initiate a liquidation process to bring the borrower's account back above water. However, if the collateral being liquidated is large and there is not enough liquidity to liquidate the loan and purchase enough assets to recover the bad debt, the protocol may be left with the bad debt. This scenario is similar to the recent "curve-mango market event" on AAVE.

To mitigate this risk, Mirai adopts use a tiered system of discount rates based on the loan-to-value (LTV) ratio.

  • 10% discount for $10,000 of undercollateralized loans;

  • 20% discount for $50,000 of undercollateralized loans;

  • 30% discount for $100,000 of undercollateralized loans;

  • 50% discount for $1,000,000 of undercollateralized loans.

This way the more the loan is undercollateralized the higher will be the discount rate offered by the protocol to incentivize the liquidator to liquidate the asset to avoid the protocol getting stuck with a bad debt. T

The higher the LTV ratio the greater the risk of liquidation and the more discount is offered to the liquidator.

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