Adding and Removing Collateral

Adding and Removing Collateral Flow

Why Adjust Collateral?

1. Respond to Margin Calls: Adding collateral is the primary way to respond to margin calls when your position approaches the risk threshold, helping you avoid potential liquidation.

2. Manage Market Volatility: Adding collateral can increase your health factor, making your loan position more resistant to liquidation. This is beneficial if you anticipate potential market volatility that could decrease the value of your existing collateral.

3. Capital Efficiency: Removing excess collateral can free up capital for other uses, such as reinvesting or deploying it in other opportunities. However, the remaining collateral after removal should still maintain a healthy level below the risk threshold.

How to Add/Remove Collateral

Adding Collateral

1. Initiate Addition: As a borrower, you can initiate the collateral addition process by:

   • Approving the collateral transfer

   • Calling the smart contract to execute the transaction

2. Smart Contract Execution: Once you've initiated the process, the smart contract:

   • Transfers the additional collateral from your wallet to the lender's wallet

   • Locks the collateral in the lender's wallet, preventing withdrawal

   • Updates the loan's collateral amount in the system

3. Health Factor Update: The TSI system automatically recalculates your position's health factor after the additional collateral is confirmed, improving your resistance to liquidation.

Collateral Addition Limits

• 10x Initial Collateral Limit: Borrowers can add collateral up to a maximum total of 10 times the initial collateral amount used when the loan was created.

  • For example, if you initially provided 1 BTC as collateral, you can add additional collateral until the total reaches 10 BTC.

• Pre-approval Alignment: This 10x limit directly aligns with the lender's pre-approved collateral transfer allowance. When a loan is created, the lender approves a transfer allowance of 10x the initial collateral to the smart contract.

• System-Enforced Ceiling: The TSI system enforces this 10x limit to:

  • Ensure all collateral transfers remain within the lender's pre-approved allowance

  • Maintain predictable security parameters for both borrowers and lenders

  • Prevent potential issues where a borrower adds more collateral than the lender has approved for management

• Benefit to Borrowers: This design provides borrowers with significant flexibility to increase collateral during market volatility without requiring additional actions from the lender.

Repayment as an Alternative

• Partial or Full Repayment: When loan LTV is significantly elevated or market price changes are dramatic, borrowers are encouraged to consider partial or full repayment of the loan instead of simply adding more collateral.

• Benefits of Partial Repayment:

  • Directly reduces your debt principal, immediately improving your loan's LTV ratio

  • Can be more capital efficient than adding collateral in many scenarios

  • Provides better protection against continued market volatility

Removing Collateral

1. Initiate Removal: As a borrower, you can initiate the collateral removal process by:

   • Calling the smart contract to transfer the collateral from the lender to you

2. System Verification: Before processing your request, the TSI system verifies that:

   • The removal won't push your LTV ratio above the risk threshold

   • You maintain adequate collateralization after the removal

3. Smart Contract Execution: If verification passes, the smart contract:

   • Unlocks the specified amount of collateral in the lender's wallet

   • Transfers it back to your wallet

   • Updates the loan's collateral amount in the system

4. Automated Process: This entire process is executed automatically based on the lender's pre-approval at loan creation, requiring no action from the lender.

Important Considerations:

1. LTV Ratio Monitoring: When adding or removing collateral, be mindful of your Loan-to-Value (LTV) ratio. The TSI platform will show you how the adjustment will affect your position before you confirm the transaction.

2. Risk Management: Carefully assess market conditions before removing collateral. A lower health factor increases your vulnerability to liquidation if the market moves against your position.

3. Collateral Types: You can only add collateral of the same type originally used for the loan. Different collateral types cannot be mixed within the same loan.

4. Transaction Timing: Collateral adjustments are processed on-chain and may take some time to be confirmed. Plan your adjustments with sufficient time to respond to market conditions.

5. Monitoring: It is crucial to monitor your loan status and the value of your collateral, especially after adjusting your collateral levels or during periods of market volatility.