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The Funding Model of DODO V3

The fund pool of DODOV3 is divided into two parts: the Vault for LPs and the Pool for SPs. LPs can earn stable income by depositing in the Vault, while SPs can build strategies to call funds from the Pool and generate excess returns.

Both Pool and Vault support a mix of multiple asset, with the asset types being managed by DODO DAO. Below, we will provide detailed explanations of the fund models for both the Vault and Pool.

funding model

Vault#

The rules for the Vault section are relatively simple. Just like most lending protocols, LPs can deposit or withdraw assets at any time. Similarly, SPs can borrow or repay assets at any time.

The interest of all assets is calculated based on the asset itself. For example, if you deposit or borrow ETH, the interest earned or paid will also be in ETH.

The interest rate for each type of asset is calculated independently and increases as the borrowing ratio for that particular asset increases. The interest rate accumulates with each block and compounds during every deposit/withdraw/borrow/repay operation.

The DODO platform will extract a portion of the interest paid by SP as platform profit, but the proportion will be determined by DAO.

Pool#

Each SP has his own pool, and the SP can only deposit or withdraw from the pool it manages. SP does not need to borrow from the Vault before starting market making. In this case, the pool functions as a private fund pool, with funds provided solely by the SP. The SP also has the ability to withdraw all funds from the pool at any time.

Borrow rules#

Unlike lending protocols like Aave, borrowing in DODOV3 cannot be withdrawn to the wallet and can only remain in the pool to provide liquidity. This also enables DODOV3 to support leveraged market-making. For example, in Aave, you can borrow 70 USDT worth of ETH with a collateral of 100 USDT. The amount of funds available to you has decreased. However, in DODOV3, you can borrow ETH worth 500 USDT which increases your funds available.

The borrowed funds generate interest which becomes a source of income for LPs. Interest begins to accrue immediately when funds are lent out, regardless of whether these funds have generated any transactions.

Collateral ratio calculation#

The healthiness of a pool is measured by two collateral ratios: regular collateral ratio and borrowing collateral ratio. The regular collateral determines whether you can withdraw funds from the pool to your wallet, while the borrowing collateral ratio determines whether you can still borrow from the vault.

Regular collateral ratio#

The calculation rule for regular collateral ratio is as follows:

  1. Check balances of each token in the pool (balance) and amounts borrowed from the vault (borrowed). Suppose net assets = balance - borrowed
  2. Positive net assets are considered as collaterals while negative net assets are considered as debts.
  3. Multiply all collaterals by their prices and weights then sum them up; this represents total collateral value. As collateral, high-volatility assets‘ weights are smaller because they are more likely to become worthless.
  4. Multiply all debts by their prices and weights then sum them up; this represents total debt value. As debt, high-volatility assets’ weights are larger because it is difficult to repay them if their prices soar in the next moment.
  5. Divide the total collateral value by the total debt value to obtain the regular collateral ratio.

There are two risk control parameters in the system, IM (Initial margin ratio) and MM (maintenance margin ratio).

As the names imply, when the regular collateral ratio falls below 1 + IM, SPs cannot borrow funds from the Vault, withdraw collateral, or trade in the pool. At this point, SPs should add more collateral or repay loans to raise the regular collateral ratio above 1 + IM again.

When the regular collateral ratio falls below 1 + MM, liquidation of the pool will occur.

For example, if IM = 40% and MM = 20%, when the regular collateral ratio is less than 140%, SPs need to adjust their strategies immediately by adding more collaterals or repaying loans to reduce leverage and increase the regular collateral ratio. If it falls below 120%, liquidation of the pool will occur.

Borrowing collateral ratio#

From the calculation formula of the regular collateral ratio, it can be found that if an SP borrows a certain asset but does not trade it, although interest is generated, this SP does not have debt. (Because the asset is in the pool and can be returned at any time) In order to prevent a malicious SP from borrowing funds indefinitely and causing other SPs to have no available funds, DODOV3 requires SP to have a certain amount of collateral when borrowing. Therefore, we introduce the concept of borrowing collateral ratio.

The calculation rule for borrowing collateral ratio is as follows:

  1. The definition of borrowing collateral ratio is simple: borrowing collateral ratio = total margin value / total borrowed value
  2. To calculate total margin value, we first need to check balances of each token in the pool (balance). Since borrowing collateral ratio is actually checked after borrowing, we need to subtract the borrowed amount from the balance to get the real margin amount (how much SP has deposited). For each token, margin amount = balance - borrowed
  3. Multiply this amount by token prices and sum them up; this represents total margin value. total margin value = sum(marginAmount * price)
  4. Multiply all borrowed tokens and their prices, and sum them up; this represents total borrowed value. total borrowed value = sum(borrowedAmount * price)
  5. Divide total margin value by total borrowed value to obtain borrowing collateral ratio.

Borrowing Collateral Ratio serves as an additional check condition when SP borrows funds. After borrowing, it must be ensured that borrowing collateral ratio is greater than IM.

Liquidation#

Liquidating a pool with multiple collaterals and debts is not an easy task.

If pool’s regular collateral ratio is below 1 + MM, then pool can be liquidated. Liquidators can buy pool’s collaterals with a discounted oracle price and pay back the debt for the pool.

If pool has bad debt, which means even if all collateral are sold out, there are still outstanding debts to be repaid, in this case, DODO will liquidate the pool, and share the losses caused by debts among all LPs in the Vault. Once DODO starts the liquidation process, the trading function of this pool is suspended, until the liquidation process is done.

When a pool is removed, the liquidation will also be conducted by DODO official.