How to value the underlying assets in a deal
Using the paired currency of the underlying assets as stated in the previous chapter, we built an engine to allow us to get the value of any token holdings in their DEX pair. This is called the underlying value in our protocol.
This enables our protocol to put value on:
Collateral
Cost / Premium
Payoff and Fees
This also enables the protocol to have support for:
Custom LTV calculations
Max loss calculations
Custom Liquidation models
Collateral value is fed into the settlement function to determine the maximum loss a buyer or writer can incur in a deal.
Options - The max loss possible for Taker is the cost paid. To writer its capped by collateral value.
Swaps - The max loss is based on the value of the collateral provided.
Our OTC lending platform allows parties to set or agree on custom LTVs when issuing loans.
Collateral value is fed into the Loan writing or taking functions, enabling parties to gauge the distance or gap in value between the loan and the collateral tokens provided.
For all hedges, collateral value only comes into question when Taker chooses to exercise right. The protocol only checks payoff and collateral value upon settlement. This means collateral value can go below and back above the liquidation level during the lifetime of a deal.