Maximum Borrowing Capacity (MBC)

Fringe Finance sets a maximum aggregate debt limit amount for each collateral asset. It applies to the sum of outstanding debt across all borrowers. This parameter ensures that price manipulation attacks are unprofitable and also that liquidators will be willing to perform liquidations by minimizing potential slippage.

To determine an asset’s debt limit, we analyze its aggregate liquidity in the markets in which it is traded. This seeks to determine how much liquidity is readily available where there is relatively little slippage.

The following diagram illustrates how the debt limit protects the Fringe Finance platform. It presents a hypothetical bid order book with a large proportion of its liquidity near the last traded market price, as is typical of order books. As liquidity dries up progressively at prices further away from the recently traded price, any subsequent trades would experience significant slippage, seriously affecting the price at which an asset could be disposed of.

The reason to further limit the available liquidity by 50% is that it’s not reasonable to assume all orders in the order book will persist in any market movement. 50% is effectively a ‘conservative factor’ for the sake of prudence.

The slippage threshold used for all collateral assets so far is 5% due to it being a point of diminishing returns. Allowing for higher slippage brings little increased liquidity and therefore is impractical.

To maximize the protection of the platform, we configured the parameters for worse-case scenarios to take into account rapid, adverse market conditions that could cause cascading liquidations to occur simultaneously.