Concepts
Understanding the core concepts of WLFI Markets is essential for effectively using the protocol. This guide explains the fundamental building blocks that make WLFI Markets work, from liquidity pools and markets to risk management parameters.
Overview
WLFI Markets is provided by Dolomite, a decentralized protocol that enables users to supply assets to earn rewards and borrow assets using their supplied assets as collateral. The protocol operates through a system of liquidity pools, markets, and risk parameters that work together to create a secure and efficient lending and borrowing platform.
Key Concepts
The main concepts covered in this guide are:
Liquidity Pool: The shared pool of assets that enables lending and borrowing
Markets: Individual asset instances within the pool with specific risk parameters
Collateral: Assets you supply that back your borrow positions
Collateral Ratio: Your position's safety metric
Liquidation Threshold: The point at which positions become at risk
Rates: Dynamic rates that adjust based on market conditions
Utilization: How much of the available liquidity is being used
E-Mode: Efficiency mode for optimized stablecoin borrowing
Risk Parameters: Settings that govern each market's behavior
Liquidity pool
It's a shared pool of assets where suppliers provide liquidity that borrowers can access through overcollateralized positions.
How liquidity pools work
When you supply assets to Dolomite through WLFI Markets, your tokens are added to the liquidity pool. This pool serves as the source of funds for borrowers, who can borrow assets against their supplied collateral. The pool operates through decentralized smart contracts that manage:
Asset Deposits: Suppliers add assets to the pool
Asset Withdrawals: Suppliers can remove their assets (subject to utilization)
Borrowing: Borrowers access liquidity from the pool using collateral
Repayment: Borrowers return assets to the pool
Reward Accrual: Suppliers earn rewards while borrowers pay rates dynamically
Pool dynamics
The liquidity pool is dynamic and changes based on user activity:
Supply: When users supply assets, the pool grows, increasing available liquidity
Borrow: When users borrow, liquidity decreases, affecting utilization rates
Rates: As utilization changes, rates adjust automatically to balance supply and demand
Liquidity Availability: The amount available to borrow depends on what's supplied and not currently borrowed
Important
The liquidity pool is shared across all users. When you supply assets, they become part of the pool and can be borrowed by others. Your supplied assets continue to earn rewards and can be withdrawn (subject to utilization), but they're part of the shared pool while supplied.
Markets
A market is an instance of a specific token within the WLFI Markets liquidity pool. Each market represents a supported asset (like USD1, USDC, ETH, cbBTC, USDT, or WLFI) with its own set of risk parameters and configurations.
Market characteristics
Each market in WLFI Markets has:
Market ID: A numerical identifier used to reference the market (more efficient than token addresses)
Underlying Asset: The actual token (e.g., ETH, USD1)
Price Oracle: Determines the current price of the asset
Borrow Rate Model: Defines how rates adjust based on utilization
Risk Parameters: Settings like liquidation threshold and margin ratios
Supply and Borrow Caps: Limits on total supply and borrowing capacity
Market parameters
Markets are configured with specific parameters that govern their behavior:
Liquidation Threshold
The point at which a position becomes liquidatable
Supply Cap
Maximum total amount that can be supplied to the market
Borrow Cap
Maximum total amount that can be borrowed from the market
Borrow Rate Model
How rates adjust based on utilization
Can Be Collateral
Whether the asset can be used as collateral
Market IDs
Markets are referenced by numerical IDs rather than token addresses. This design allows for efficient on-chain lookups and stable references even if underlying token implementations change. When interacting with the protocol programmatically, always use Market IDs.
For a complete list of available markets, see the Markets documentation.
Collateral
Collateral refers to assets you supply to WLFI Markets that can be used to secure borrowed positions. The liquidation threshold determines how much you can borrow against your collateral.
Understanding borrowing power
The liquidation threshold represents the maximum percentage of your collateral's value that you can borrow. For example:
If you supply $10,000 worth of ETH with an 85% liquidation threshold, you can borrow up to $8,500 worth of other assets
Some assets cannot be used as collateral for borrowing
How collateral works
When you supply assets to WLFI Markets:
Collateral Value: Your supplied assets are valued at their current market price
Borrowing Power: The liquidation threshold determines how much you can borrow
Position Safety: Lower borrowing amounts mean more collateral buffer, reducing liquidation risk
Dynamic Updates: As asset prices change, your borrowing power adjusts automatically
Important
Not all assets can be used as collateral. Always check an asset's collateral status before supplying if you plan to borrow.
Collateral ratio
The Collateral Ratio is a critical metric that indicates the safety of your borrow position. It measures how close your position is to liquidation.
Understanding collateral ratio
Collateral Ratio is calculated as:
Collateral Ratio > 1.0: Your position is safe
Collateral Ratio = 1.0: You're at the liquidation threshold
Collateral Ratio < 1.0: Your position can be liquidated
Collateral ratio ranges
> 2.0
Safe
Healthy position with significant buffer
1.5 - 2.0
Good
Adequate safety margin
1.1 - 1.5
Warning
Approaching liquidation threshold
1.0 - 1.1
Dangerous
Very close to liquidation
< 1.0
Liquidatable
Position can be liquidated
Monitoring collateral ratio
Your Collateral Ratio changes based on:
Asset Price Movements: If collateral prices drop or borrowed asset prices rise, Collateral Ratio decreases
Borrow Position Growth: As your borrow position grows over time, your Collateral Ratio decreases
Supplying More: Adding more collateral increases Collateral Ratio
Withdrawals: Removing collateral decreases Collateral Ratio
Borrowing: Taking on more debt decreases Collateral Ratio
Repayment: Paying back debt increases Collateral Ratio
Critical
Always monitor your Collateral Ratio, especially when:
Market volatility is high
You're approaching the liquidation threshold (1.0)
You have large borrow positions
Asset prices are moving against your position
If your Collateral Ratio drops below 1.0, your position can be liquidated, resulting in loss of collateral.
You can view your Collateral Ratio on the Dashboard or in the Collateral Ratio dialog, which shows a visual representation of your position's safety and your current liquidation threshold.
Liquidation threshold
The Liquidation Threshold is the maximum borrowing ratio at which your position can be liquidated. Once your position exceeds this threshold, it becomes eligible for liquidation.
How liquidation works
When your position exceeds the liquidation threshold:
Liquidation Eligibility: Your position becomes eligible for liquidation
Liquidator Action: Anyone can liquidate your position to earn a liquidation reward
Collateral Withholding: A portion of your collateral is withheld to cover your borrow position
Liquidation Penalty: A penalty is applied to the liquidated amount
Understanding the threshold
The liquidation threshold defines the maximum amount you can borrow relative to your collateral. For example:
Liquidation Threshold: 85% (when liquidation becomes possible)
If asset prices move against you or borrow rates accrue, your position can exceed the threshold.
Preventing liquidation
To avoid liquidation:
Monitor Collateral Ratio: Keep it well above 1.0
Add Collateral: Supply more assets to increase your collateral value
Repay Debt: Reduce your borrowed amount
Maintain Buffer: Don't borrow at maximum capacity; keep a safety margin
Important
Liquidation can result in significant losses. The liquidator receives a reward, and you pay a penalty. Always maintain an optimal Collateral Ratio to avoid liquidation risk.
Rates
Rates in WLFI Markets are dynamic and adjust automatically based on market conditions. Suppliers earn rewards on their supplied assets, while borrowers pay rates on their borrowed assets.
Supply rates
Supply rates are the rates that suppliers earn on their deposited assets. These rates:
Accrue Continuously: Rewards are calculated and added to your balance continuously
Vary by Asset: Different assets have different supply rates
Adjust Dynamically: Rates change based on utilization and market conditions
Include Incentives: May include additional rewards like USD1 Points
Borrow rates
Borrow rates are the rates that borrowers pay on their borrowed assets. These rates:
Accrue Continuously: Rates accumulate on your debt over time
Vary by Asset: Different assets have different borrow rates
Adjust Dynamically: Rates increase as utilization increases
Impact Collateral Ratio: Higher rates mean faster debt growth
Rate models
Rates follow a utilization-based model:
Low Utilization: Lower rates to encourage borrowing
Optimal Utilization: Rates begin to increase more steeply
High Utilization: Higher rates to discourage borrowing and encourage supply
This model helps balance supply and demand, ensuring liquidity remains available.
Net rate
Your Net Rate represents your overall earning or paying rate across all positions:
Positive Net Rate: You're earning more than you're paying
Negative Net Rate: You're paying more than you're earning
Rate Updates
Rates update continuously as market conditions change. The rates you see are current rates and may change based on utilization, governance decisions, and market dynamics.
Utilization
Utilization measures how much of the available liquidity in a market is currently being borrowed. It's expressed as a percentage of total supplied assets that are borrowed.
Understanding utilization
Utilization is calculated as:
Low Utilization (0-50%): Plenty of liquidity available, lower rates
Medium Utilization (50-80%): Moderate liquidity, moderate rates
High Utilization (80-100%): Limited liquidity, higher rates
Impact on rates
Utilization directly affects rates:
Low Utilization: Lower rates to incentivize borrowing
Increasing Utilization: Rates gradually increase
High Utilization: Significantly higher rates to:
Discourage additional borrowing
Incentivize suppliers to add more liquidity
Ensure liquidity remains available for withdrawals
Utilization and your position
High utilization can affect your ability to:
Borrow More: Limited liquidity may restrict additional borrowing
Withdraw: If utilization is very high, there may be insufficient liquidity for withdrawals
Rates: Higher utilization means higher borrow rates, increasing your debt faster
Optimal Utilization
Each market has an optimal utilization rate where the rate model transitions. Below optimal, rates increase slowly. Above optimal, rates increase more rapidly to balance supply and demand.
E-Mode (efficiency mode)
E-Mode (Efficiency Mode) is a feature that optimizes borrowing when your collateral and borrowed assets are in the same risk category (e.g., stablecoins).
How E-Mode works
When E-Mode is active:
Higher Liquidation Threshold: You can borrow more against your collateral (e.g., 90% instead of 85%)
Same Category Only: Both collateral and borrowed assets must be in the same category
Automatic Activation: E-Mode activates automatically when you supply and borrow assets from the same category
Category Restrictions: You can only borrow assets from the same category while E-Mode is active
E-Mode categories
Common E-Mode categories include:
Stablecoins: USD1, USDC, USDT etc.
ETH: ETH-related assets
Other Categories: As defined by protocol governance
Benefits and considerations
Benefits:
Higher borrowing power
More efficient capital utilization
Lower collateral requirements for same borrowing amount
Considerations:
Limited to same-category assets
Higher liquidation threshold means less safety buffer
Must maintain category alignment to keep benefits
E-Mode Activation
E-Mode activates automatically when you supply and borrow assets from the same category. For example, supplying USD1 and borrowing USDC will activate Stablecoin E-Mode, giving you higher borrowing power for stablecoin-to-stablecoin positions.
For more details, see the E-Mode documentation.
Risk parameters
Risk parameters are settings that govern each market's behavior and determine how assets can be used within WLFI Markets. These parameters are set by Dolomite governance and can vary between markets.
Key risk parameters
Liquidation Threshold
Point where liquidation becomes possible
Defines your safety margin and borrowing power
Margin Ratio
Used for margin calculations
Affects borrowing capacity
Margin Premium
Additional margin requirement per asset
Adjusts threshold for specific assets
Supply Cap
Maximum total supply
Limits market size
Borrow Cap
Maximum total borrowing
Controls borrowing capacity
Borrow Rate Model
How rates adjust
Affects supply and borrow rates
Liquidation Reward
Reward for liquidators
Incentivizes liquidations
Parameter variations
Risk parameters can vary:
Between Markets: Different assets have different parameters based on risk assessment
Over Time: Governance can adjust parameters based on market conditions
By Category: E-Mode categories may have different parameter sets
How parameters affect you
Risk parameters directly impact:
Borrowing Capacity: Liquidation threshold determines how much you can borrow
Position Safety: Liquidation threshold defines your risk level
Rates: Rate models affect what you earn or pay
Market Availability: Caps limit total supply and borrowing
Parameter Changes
Risk parameters can change through Dolomite governance. Monitor protocol announcements and parameter updates, as they may affect your positions and strategies.
For more information about risk management, see the Dolomite Risk Management documentation.
How concepts work together
These concepts work together to create the WLFI Markets ecosystem:
Suppliers add assets to Markets within the Liquidity Pool
Borrowers use supplied assets as Collateral to borrow other assets
Liquidation Threshold determines borrowing capacity based on collateral value
Collateral Ratio monitors position safety
Rates adjust based on Utilization to balance supply and demand
E-Mode optimizes borrowing for same-category assets
Risk Parameters govern all market behavior
Understanding these relationships helps you:
Make informed decisions about supplying and borrowing
Manage risk effectively
Optimize your positions
Avoid liquidation
What's next?
Now that you understand the core concepts, you can:
Supply - Learn how to supply assets to earn rewards
Borrow - Understand how to borrow against your collateral
Withdraw - Learn how to remove your supplied assets
Repay - Understand how to pay back borrowed assets
Additional resources
WLFI Markets Overview - High-level overview of WLFI Markets
Markets - Complete list of available markets
E-Mode - Learn more about efficiency mode
Dolomite Documentation - Technical documentation for the underlying protocol
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