⚖️Coverage Ratio

While other AMMs use the number of tokens to determine the exchange rate, Capybara inherits from Wombat of using an asset-liability management model to price assets.

The coverage ratio $r_x$of an asset refers to the pool's ability to cover its debt payment. Each stablecoin in a pool has its coverage ratio.

$$coverageRatio_x (r_x) = \frac{Cash_x}{Liability_x}$$

Liquidity provided to the protocol would become a liability​. When users deposit and withdraw, liability changes, respectively.

The asset of token x is the amount of cash in the liquidity pool. Generally speaking, an asset of higher coverage indicates a lower default risk, and actions that increase the coverage ratio of a token are incentivized.

Coverage Ratio: What is it and Why Is it Healthy for your DepositsMedium