Collateralization Model

The value of an LP token is always backed 50-50 by the underlying tokens in the token pair. In order to determine how much collateral is necessary for borrowing and ensure borrowers can’t borrow more than the value of their collateral, the Fluid Protocol needs to reliably calculate the value of LP tokens.

The collateralization model in Fluid determines the collateral needed for a loan, given the safety margin and liquidation incentive parameters for the lending pool.

These safety margin and liquidation incentive parameters work to ensure that even after a volatile price swing in the underlying tokens, there will always be enough collateral to both repay the loan and pay a liquidator in the event of liquidation.