COTI Health Factor calculation to understand liquidation risk

COTI, short for "Currency of the Internet," is at the center of a decentralized payment network aiming to provide scalable, low-cost transactions for merchants and consumers. Utilizing a Directed Acyclic Graph (DAG) ledger, COTI offers instant settlement, stability mechanisms, and a suite of financial products, enhancing accessibility and efficiency in digital payments. These are the premises of a strong projects and I have invested in it by reading the posts created by @cryptoandcoffee and tried to follow his steps along the way. And while I might not be rich out of it (yet), I have put my COTI assets at work and continuing to accumulate.

Just less than one week ago I created a new Deposit on COTI which initially had a 44% APR and now is hovering around . One thing that I had to decide when I've created the new deposit was if to use a Multiplier on it. Before taking a decision, I've asked around and did a little bit of reading which clarified how a Multiplier is affecting the Health Factor based on price deviations and how that can trigger even a liquidation risk. So here is some information one that which you might find useful as well.

What is the Deposit Multiplier?

A deposit multiplier enables you to increase your deposited amount, but in the same time it contributes to raising the risk profile and as a result the %APY. Setting a higher multiplier will multiply the deposited amount within the treasury, which will result in a higher deposit APY. Increasing the multiplier value above x1 also introduces a deposit liquidation risk as the multiplier has a direct impact on the deposit health factor, which is calculated based on COTI’s price fluctuations. I think this acts in the same way as the "Leverage" from the Forex domain. Using a x1 Multiplier implies that no risk is added to the deposited amount.

What is the Deposit Health Factor?

The Deposit Health Factor calculation is used to determine the health of the deposit; if the health factor falls to 1.0 the deposit will be at a liquidation risk that may lead to the liquidation of the entire deposit amount. Health factors may increase and decrease based on COTI price fluctuations. When the COTI price increases, the health factor does too, and if the price decreases, so will the deposit’s health factor.

What are the available Health Factor/ Multiplier combinations?

Deposits with a multiplier of x2 start with health factor 2.0, deposits with a health factor of x3 start with a health factor of 1.5, and deposits with multiplier x4 start with a health factor of 1.33.

How is the Health Factor calculated and how can it be improved?

Health factor ratio (HFR)= Multiplier(Multiplier - 1)
Health Factor = HFR/ (Original Deposit Amount * Deposit Price)(Original Deposit Amount * Current Price)

Example 1 - Initial deposit:
Multiplier: x2
Amount: 1,000 COTI
Original deposit price: 1.00$
Current price: 1.00$
Health factor ratio (HFR)= 2(2 - 1)= 2
Health Factor = 2 / (1000 * 1)(1000 * 1)= 2

Example 2 - Price Fluctuation (-20%):
Multiplier: x2
Amount: 1,000 COTI
Original deposit price: 1.00$
Current price: 0.80$
Health factor ratio (HFR) = 2(2 - 1)= 2
Health Factor = 2 / (1000 * 1)(1000 * 0.8)= 1.6

Example 3 - Deposit Top-up to improve Health Score:
Multiplier x2
Initial deposit amount: 1,000 COTI
Original deposit price: 1.00$
Current COTi price: 0.80$
Health factor ratio (HFR)= 2(2 - 1) = 2
Health Factor = 2 / (1000 * 1 + 5000.8)(1000 * 0.8 + 5000.8) = 1.72

A 10% COTI price difference will have a lower health factor decrease on a deposit with a multiplier x4 than it would on a deposit with a multiplier x2. Nevertheless, any unfavorable price fluctuation might trigger a liquidation risk and the only way to fight it is through top-ups. As that would mean a lot of attention and management by the potential risks, I have decided to use a x1 Multiplier, thus no risk will be associated to my deposit.

Posted Using InLeo Alpha