Credit Accounts
Understanding Credit Accounts on Mars
To understand how a Credit Account works, let's break down some key concepts:
Collateral vs. Debt
Collateral: Assets you deposit into your Credit Account. These assets back your borrowing and trading activities.
Debt: The amount you've borrowed against your collateral.
Leverage and Risk
Taking leverage can amplify both gains and losses. It comes with risks, including the possibility of liquidation.
Health Factor
The Health Factor is a crucial metric that determines the safety of your Credit Account.
Your account is considered healthy when your (Adjusted) Collateral Value > Debt
This relationship is expressed as the Health Factor
A Health Factor > 1 means your account is healthy
A Health Factor ≤ 1 means your account is at risk of liquidation
Health Factor Calculation
The Health Factor is calculated using this formula:
Health Factor = (Collateral Value * LTV) / Debt
Where:
Collateral Value: The total value of assets in your Credit Account
LTV: Loan-to-Value ratio, which varies depending on the context (see MaxLTV and LiqLTV below)
Debt: The total amount borrowed
Risk Parameters: MaxLTV vs. LiqLTV
Mars Protocol uses two different LTV parameters to manage risk:
MaxLTV (Maximum Loan-to-Value)
Used when entering a new position
Determines how much you can borrow against your collateral
Applied in calculating the Account Health Factor for new positions
LiqLTV (Liquidation Loan-to-Value)
Used to determine if an existing position is at risk of liquidation
Applied in calculating the Account Health Factor for liquidation purposes
Generally Higher than MaxLTV
Why the Difference?
The difference between MaxLTV and LiqLTV provides a safety margin. If a user maxes out their leverage when entering a new position (using MaxLTV), small market movements won't immediately cause the account to be liquidated. The higher LiqLTV gives some buffer before liquidation occurs.
Credit Account Example
Below is an example of a Credit Account, showing how collateral, debt, and health factors are calculated:
Collateral Assets
BTC
5
$100,000
$500,000
70%
73%
$350,000
$365,000
USDC
50,000
$1
$50,000
80%
82%
$40,000
$41,000
Debt
ETH
38
$9,950
$378,100
Health Factors
Health Factor (MaxLTV)
1.03
Health Factor (LiqLTV)
1.07
Explanation:
Collateral: The account holds two assets as collateral - BTC and USDC.
CP MaxLTV: Collateral Power using Maximum LTV
CP LiqLTV: Collateral Power using Liquidation LTV
Debt: The account has borrowed 38 ETH, valued at $378,100.
Health Factors:
Using MaxLTV: 1.03 (slightly above the safe threshold of 1)
Using LiqLTV: 1.07 (provides a small buffer against liquidation)
The difference between MaxLTV and LiqLTV creates a safety margin, allowing for some market fluctuation before the account becomes at risk of liquidation.
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