Smart Farming: Understanding Liquidations, Health Factors, and Collateralization Ratios

MetronomeDAO
2 min readMay 24, 2023

A closer look at how Metronome’s essential components work and their use in Smart Farming

Overview

With the recent release of Smart Farming, users can now loop yield in a single user-friendly and gas-sensitive transaction. However, in this world, there are a few essential concepts such as Liquidations, Health Factors, and Collateralization Ratios that need to be understood in order to optimize your yield farming experience. Let’s get stuck in.

Liquidations

To maintain the stability of over-collateralized positions within Metronome, each collateral asset is assigned a Collateralization Ratio (CR). This CR is determined based on the risk framework, which evaluates collateral assets according to factors such as open market liquidity and smart contract risk. The collateral requirements for a user’s account are determined by multiplying the value of each deposited collateral by its corresponding Collateralization Ratio.

Understanding liquidations in Metronome is crucial for users who want to protect their positions and manage risk effectively.

Note: There is no grace period following a liquidation. Users can be continually liquidated should they fail to remediate their position.

Health Factors (HF)

Health Factors help you monitor the well-being of your assets within the Metronome application. Understanding HFs is a must when managing your assets effectively and minimizing the risk of liquidation. The Health Factor within Metronome is determined by the amount of collateral vs. the value of a user’s synthetic assets.

To calculate the HF, you must first find the maximum amount of outstanding assets a user can issue, known as the issuable limit. The issuable limit is calculated by taking the deposit value (denominated in the underlying token) and multiplying it by the CR of the deposited token. If a user’s outstanding position is less than or equal to their issuable limit, their HF is deemed healthy. However, if the outstanding amount surpasses the issuable limit, the Health Factor drops below the healthy threshold, putting their position at risk for liquidation.

Your Health Factor can be found on the Metronome dashboard at any time. Note that any type of additional mintage, whether direct or via Smart Farming, will lower your Health Factor and increase the probability of liquidation.

Collateralization Ratio (CR)

Collateralization Ratios play an essential role in determining how much yield you can loop within the Smart Farming platform. A higher CR enables more loopage, increasing your yield potential and raising the risk of liquidation.

For example, if an asset has a CR of 80%, the maximum loopage is 1 / (1–0.8) = 5. As the collateral ratio increases, so does the maximum loopage possible.

Keep up with Metronome

For more information about how Liquidations, Health Factors, and Collateralization Ratios work, please check out the official Metronome documentation.

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MetronomeDAO

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