In order to determine how to allocate capital from the Senior Pool, the protocol uses the novel principle of "trust through consensus." This means that while the protocol doesn't trust any individual Backer or Auditor, it does trust the collective actions of many of them. At a high level: when more Backers supply capital to a given Borrower Pool, the Senior Pool increases the ratio with which it adds leverage.
Because this approach relies on counting individual Backers, the protocol must ensure they are in fact represented by different people. Therefore, all Backers, Borrowers, and Auditors require a
unique entity checkto participate (see the Unique Entity Check section).
The leverage amount,
, that the Senior Pool allocates is determined by the formula,
- is the total capital supplied by Backers.
- is the distribution adjustment on a scale ofto, which accounts for how evenly distributed the Backers are.is closer towhen the distribution is skewed and closer towhen the Backers are more equally distributed. This ensures no single Backer has an outsized influence. The formula foruses the percent supplied by each Backer,, and is based on the Herfindahl-Hirschman Index:
- L is the leverage ratio on a scale ofto the maximum potential leverage ratio. Based on the number of Backers,, the leverage ratio increases linearly from, the minimum number of Backers necessary for leverage, to, the maximum number of Backers necessary to achieve the maximum potential leverage,: