Collateral Risk
What is collateral risk?
Collateral risk refers to the potential for the value of collateral assets, such as BTC, to decrease, undermining their capacity to back the stablecoin, $BITU.
When the price of a collateralized asset falls, it lowers the collateral ratio. If this ratio continues to drop, it can reach a point where the value of the collateral is less than the value of $BITU minted, compromising the stablecoin's value support in the market.
How do We handle collateral risk?
To manage collateral risk, BitU Protocol incorporates several strategies:
Whitelist Control: During the minting phase, only whitelisted addresses are allowed to mint $BITU, minimizing exposure to collateral risk for most retail users.
Asset Requirements: The protocol maintains strict requirements on the types of assets that can be used as collateral, ensuring a balanced ratio between collaterals with different risk levels.
Proactive Liquidation: For positions deemed relatively risky, the protocol’s Active Liquidity Management Module (ALMM) will promptly liquidate these positions if the collateral is not replenished or if the minted $BITU is not burned/returned. This helps convert riskier positions into safer ones, stabilizing the overall collateral ratio within the protocol.
These measures help maintain the integrity and stability of the BitU ecosystem by mitigating the effects of price fluctuations on the collateral assets.
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