# 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](https://dolomite.io), 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. {% hint style="info" %} **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 {% endhint %} *** ## 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 {% hint style="warning" %} **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. {% endhint %} *** ## 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: | Parameter | Description | | ------------------------- | --------------------------------------------------------- | | **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 | {% hint style="info" %} **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. {% endhint %} For a complete list of available markets, see the [Markets](https://github.com/worldliberty/public-docs/blob/main/markets.md) 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: 1. **Collateral Value**: Your supplied assets are valued at their current market price 2. **Borrowing Power**: The liquidation threshold determines how much you can borrow 3. **Position Safety**: Lower borrowing amounts mean more collateral buffer, reducing liquidation risk 4. **Dynamic Updates**: As asset prices change, your borrowing power adjusts automatically {% hint style="warning" %} **Important** Not all assets can be used as collateral. Always check an asset's collateral status before supplying if you plan to borrow. {% endhint %} *** ## 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 = Total Collateral Value / Total Borrowed Value ``` * **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 | Collateral Ratio | Status | Description | | ---------------- | ------------ | ---------------------------------------- | | **> 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 {% hint style="warning" %} **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. {% endhint %} 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: 1. **Liquidation Eligibility**: Your position becomes eligible for liquidation 2. **Liquidator Action**: Anyone can liquidate your position to earn a liquidation reward 3. **Collateral Withholding**: A portion of your collateral is withheld to cover your borrow position 4. **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 {% hint style="warning" %} **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. {% endhint %} *** ## 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: ``` Net Rate = (Rewards Earned on Collateral - Rates Paid on Debt) / Net Worth ``` * **Positive Net Rate**: You're earning more than you're paying * **Negative Net Rate**: You're paying more than you're earning {% hint style="info" %} **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. {% endhint %} *** ## 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: ``` Utilization = Total Borrowed / Total Supplied × 100% ``` * **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 {% hint style="info" %} **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. {% endhint %} *** ## 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 {% hint style="info" %} **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. {% endhint %} For more details, see the [E-Mode](/wlfi-markets/e-mode.md) 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](https://docs.dolomite.io/dolomite-governance) and can vary between markets. ### Key risk parameters | Parameter | Description | Impact | | ------------------------- | ---------------------------------------- | ---------------------------------------------- | | **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 {% hint style="warning" %} **Parameter Changes** Risk parameters can change through [Dolomite governance](https://docs.dolomite.io/dolomite-governance). Monitor protocol announcements and parameter updates, as they may affect your positions and strategies. {% endhint %} For more information about risk management, see the [Dolomite Risk Management documentation](https://docs.dolomite.io/risk-management). *** ## How concepts work together These concepts work together to create the WLFI Markets ecosystem: 1. **Suppliers** add assets to **Markets** within the **Liquidity Pool** 2. **Borrowers** use supplied assets as **Collateral** to borrow other assets 3. **Liquidation Threshold** determines borrowing capacity based on collateral value 4. **Collateral Ratio** monitors position safety 5. **Rates** adjust based on **Utilization** to balance supply and demand 6. **E-Mode** optimizes borrowing for same-category assets 7. **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** ](https://github.com/worldliberty/public-docs/blob/main/how-to-guides/supply.md)- Learn how to supply assets to earn rewards * [**Borrow**](https://github.com/worldliberty/public-docs/blob/main/how-to-guides/borrow.md) - Understand how to borrow against your collateral * [**Withdraw**](https://github.com/worldliberty/public-docs/blob/main/how-to-guides/withdraw.md) - Learn how to remove your supplied assets * [**Repay**](https://github.com/worldliberty/public-docs/blob/main/how-to-guides/repay.md) - Understand how to pay back borrowed assets *** ## Additional resources * [WLFI Markets Overview](/wlfi-markets/overview.md) - High-level overview of WLFI Markets * [Markets](/wlfi-markets/markets.md) - Complete list of available markets * [E-Mode](/wlfi-markets/e-mode.md) - Learn more about efficiency mode * [Dolomite Documentation](https://docs.dolomite.io) - Technical documentation for the underlying protocol --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.worldlibertyfinancial.com/wlfi-markets/concepts.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.