Crypto Loans and Risk Management
The information on this page and all other pages owned by, operated by, or related to Hector Network are for educational purposes only and does not constitute any kind of advice. Please read our Disclaimers page first.
There is a very common saying in the markets:
Never risk more money than you can afford to lose.
This is equally true for lending and borrowing platforms like Hector Institute.
This guide will explain some key terms and give an overview on how to use Hector Institute whilst keeping risk to an acceptable level.
This guide is meant for educational purposes only, and does not constitute financial advice.
Collateral is the capital or value put up to secure a loan. For example: when taking a loan of FTM tokens worth $100 it is common practice to put up tokens of value to secure the loan.
When the value of the collateral is less than the value of the borrowed tokens, this is called an undercollateralised loan. When the value of the collateral is higher than the value of the borrowed tokens, this is called an overcollateralised loan.
Overcollateralised loans are considered safer, and are used by Hector Institute.
Hector Institute offers Overcollateralised Loans. An Overcollateralised Loan is a loan wherein the collateral put up to secure the loan is worth more than the tokens borrowed. The amount of collateral required for a given loan depends upon that token's collateral factor.
The ratio which determines how much collateral is required to take out a loan of a given token. For example, if a user supplies 100 DAI as collateral, and the collateral factor for DAI is 60%, then the user can borrow assets worth 60 DAI (60% of the collateral supplied).
Collateral factors can vary from token to token.
When the value of a borrowed position exceeds the amount allowed by the collateral factor, liquidation will happen. At Hector Institute, a borrow position will be partially liquidated to rebalance the loan. When a loan is liquidated, a liquidation incentive is also charged to the loan. For wsHEC, this is 12%. For all other loans it is 10%.
The Liquidation Factor is the rate at which loans are liquidated when they become undecollateralised. Hector Institute has a liquidation factor of 50%. This means that if you borrow tokens, once the value of the loan rises above 50% of the value of the collateral, the loan may be liquidated. The amount of the loan liquidated is determined by the Close Factor.
The Close Factor is the amount of an undercollateralised loan which is liquidated. Hector Institute has a Close Factor of 50%. This means that in the event of a liquidation, 50% of the position will be liquidated.
To keep a borrowing position open, a compounding interest rate is applied at each network block. This means that to repay a loan, you will need a larger value of tokens than were borrowed. Interest rates at Hector Institute can vary but are usually about 2%.
The risk of liquidation can, in part, be reduced by supplying more collateral and borrowing fewer tokens. This increases the margin you have against liquidation and gives more protection from market forces.
Review your open positions
It is also advisable to regularly keep an eye on your positions. Market downturns can happen quickly and cause liquidations with little warning. Regularly reviewing your open positions can help you manage your risk tolerance and stick to it.
Find your risk tolerance, don't trade emotionally
Crypto loans should only be used by people who fully understand them. Users should feel comfortable and have a pre-defined risk tolerance. Trading emotionally (FOMO, FUD) can lead to loss.
Above all, never risk what you cannot afford to lose
Countless successful traders often advise risk management and diversification. Do not risk what you cannot afford to lose. Nothing is guaranteed.