Risk Management
Last updated
Last updated
Risk management is a crucial aspect of Vanna, ensuring stability in a two-sided trading environment. Vanna helps traders who open undercollateralized loans and execute derivative strategies, which involve significant risks due to leverage. The protocol is designed to effectively handle these risks, maintaining a balanced and secure trading ecosystem.
When traders use leverage with Vanna, their Smart Account serves as collateral for external protocols and actions. This collateral includes both the trader's initial funds and the borrowed amount. Vanna continuously monitors the tokens in the trader's portfolio and determines their value in relation to the borrowed asset. For each Smart Account, Vanna calculates a health factor, which helps manage the risk of liquidation. If the health factor falls below a certain threshold, Vanna initiates liquidation to protect the borrowed assets.
Where:
Total Balance is the current value of all the assets in the trader's portfolio.
Total Borrow Balance is the total amount borrowed by the trader from the protocol.
A higher health factor indicates a safer position, while a lower health factor indicates a higher risk of liquidation.
To maintain a safe margin and avoid liquidation, the health factor should be greater than 1.2. If the health factor drops below this threshold, the position may be at risk of being liquidated.
When Vanna's bot detects that a position needs to be liquidated, the liquidator takes the following actions:
Close All Active Positions:
The liquidator closes all active positions held by the trader to prevent further losses and stabilize the account.
Sell Off Collateral:
The liquidator sells off the collateral assets in the trader's Smart Account to repay the borrowed amount.
Update Account Status:
The liquidator updates the account status to reflect the liquidation and ensures the borrowed amount is fully covered.
Before initiating liquidation, Vanna sends a notification to the trader, prompting them to add funds to their account. This is similar to a margin call in traditional finance, giving the trader an opportunity to restore their account balance and avoid liquidation.
