Collateral
The network employs four primary sources of collateral:
Cash Collateral: Serving as the first line of defense against losses, cash collateral is calculated as a percentage of the loan purchased by the capital pool, with 50% locked upon disbursement. The amount is based on the portfolio's projected loss and is adjusted over time according to performance. As the loan is repaid from future sales, a portion of the cash collateral funds the success fee disbursed to the originator, while the remainder stays in a buffer to protect against potential losses.
Originator Tokenized Collateral: Represented by the originator's NCTs, this collateral reflects the tokenized value of the originator's portfolio. An amount equivalent to each loan disbursed by the capital pool is locked, securing the loan.
Network Tokenized Collateral: The network’s NCTs, represented by SVO, signify the collective tokenized value of the entire network’s portfolio, with an equal amount of SVO locked alongside the originator’s NCTs.
Counterpart Assets: The counterpart asset in DEX pools (e.g., USDC) provides a market-driven valuation for NCT collateral, serving as an additional layer of collateral for the originator’s portfolio. As the portfolio grows, the value of these counterpart assets increases, creating a continually expanding buffer against potential losses. This setup aligns the originator's interests with the stability of the DEX pools, as minimizing losses helps reduce volatility. In turn, this instills greater confidence among capital sources in the underlying protection of their capital.
Tokenized Collateral and Counterassets
While cash collateral has inherent value, establishing a market-driven benchmark is crucial for validating the value of tokenized collateral like NCTs. The protocol achieves this by leveraging decentralized exchanges (DEXs) like Uniswap.
To support this, 50% of cash collateral funds are used to purchase the counterpart asset in DEX trading pools for the originator's NCT and SVO. These trading pairs are actively traded on the DEX, ensuring that the value of tokenized collateral is determined by market dynamics.
Proceeds from the sale of the originator’s NCTs are carefully managed. After accounting for liquidity needs—ensuring the pool remains stable and avoids excessive volatility—any remaining proceeds are returned by the protocol to the locked collateral.
Once the underlying loan that generated the collateral is repaid, the locked collateral is used to fund a success fee disbursed to the originator. This approach leverages the liquidity and transparency of DEXs to establish a reliable, market-driven value for tokenized collateral, while also providing validators, capital sources and other stakeholders with a channel to acquire the NCTs necessary for participating in the network.
If an originator exits the network, the counterasset from their DEX pool is disbursed to the active capital sources within that pool. If no active participants remain in the specific pool, the counterasset is distributed across the network to all active capital sources.
Example of Collateral
Loan Amount: $5,000
Exchange Ratio: 2X
Future Sales: $10,000 (Loan Amount * Exchange Ratio)
Projected Portfolio Loss: 20%
Total Cash Collateral Required: 20% of Future Sales
Cash Collateral: $2,000 (20% of $10,000 Future Sales)
Collateral Locked: $1,000 (50% of Cash Collateral)
Counter Asset: $1,000 (Other 50% used for DEX pools)
Originator's Tokenized Collateral (NCT): $10,000 (Equivalent to Future Sales)
Network's Tokenized Collateral (SVO): $10,000 (Equivalent to Future Sales)
Loss Management
Losses are managed on a loan-by-loan basis, offering granular, real-time protection compared to the traditional portfolio-level approach. In the event of a loan default—recognized by the network after 90 days, in line with industry standards—the order of collateral liquidation is as follows:
Cash Collateral
Originator NCTs
Counter Assets
Network NCTs
Proceeds from collateral liquidation are first allocated to fully cover the senior tranches, with any remaining funds directed to the subordinated tranches. The protocol oversees the distribution of these proceeds, ensuring assets are allocated according to the established hierarchy.
Collateral Adjustments
As the loan balance decreases or the value of the underlying NCTs fluctuates, the protocol automatically adjusts the tokenized collateral level to maintain the required collateral ratio. If additional originator or network NCTs are needed due to value changes, the protocol allocates them from the corresponding reserves. Originators must maintain a sufficient reserve of NCTs, accessible by the protocol, for these adjustments. Cash collateral, initially set based on the originator's projection of portfolio losses, is dynamically adjusted over time in response to portfolio performance.