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Both Traders and LPs of Aark Digital can deposit any whitelisted assets they want as collateral. To also achieve stability, Aark implements a Collateral Weight function to price collateral. This function is outlined below and is modeled after the AAVE TLV mechanism. Because the balance of users' collateral is securely held within the protocol, it is only accessible to the user unless the user's position is liquidated due to falling below the required collateralization ratio. This system significantly benefits users, enabling them to trade or provide liquidity without needing to sell/convert any of their held assets.
Each collateral has an initial weight and total weight. Weight is used to calculate account value.
Liquidity Provider: As an example, both Alice and Bill want to deposit LP. Alice decides to provide ETH liquidity and deposits $1000 of ETH. For this, Alice would be able to purchase $830 of ALP. Bill deposits $1,000 of USDC in liquidity. For this Bill would be able to purchase $1,000 of ALP. Although Bill will earn more than Alice on a dollar basis, Alice is permitted to take exposure to ETH while earning fees. Under this model, LPs will be able to design their own strategies and earn returns with any whitelisted asset.
Trader: The same example above applies to traders as well. Alice wants to trade with ETH and deposits $1000 of ETH into her futures account. This will give Alice $830 of margin to trade any product in Aark. Bill, on the other hand, wants to hold USDC and so deposits $1,000 of USDC into his futures account. This will give Bill $1,000 of margin to trade any product on Aark. Again, each user will be able to determine their own strategy and exposure to the market.
If a user’s total account value drops below 0, the collateral will be at risk of being liquidated.
Then, liquidators will repay the negative USD balance of users and liquidate the collateral at a discounted price.
Liquidation is determined by price feeds from a Coin Metrics Oracle. The liquidation price is also calculated using price feeds from an oracle.