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Leverage Model
The Leverage Model determines how much capital the Senior Pool allocates toward each Borrower Pool, based on how much it trusts each Borrower Pool. Currently, the leverage model as described here is not yet live, but the community put forward a proposal, linked here.

Trust Through Consensus

In order to determine how to allocate capital from the Senior Pool, the protocol uses a 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 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 check to participate (see the Unique Entity Check section).

Leverage Model Formula

The leverage amount,
AA
, that the Senior Pool allocates is determined by the formula,
A=Sβˆ—Dβˆ—LA = S * D * L
where:
  • ​
    SS
    is the total capital supplied by Backers.
  • ​
    DD
    is the distribution adjustment on a scale of
    00
    to
    11
    , which accounts for how evenly distributed the Backers are.
    DD
    is closer to
    00
    when the distribution is skewed and closer to
    11
    when the Backers are more equally distributed. This ensures no single Backer has an outsized influence. The formula for
    DD
    uses the percent supplied by each Backer,
    sns_{n}
    , and is based on the Herfindahl-Hirschman Index:
D=1βˆ’βˆ‘i=1nsn2D = 1-\sum_{i=1}^n s_n^2
  • L is the leverage ratio on a scale of
    00
    to the maximum potential leverage ratio. Based on the number of Backers,
    bb
    , the leverage ratio increases linearly from
    BminB_{min}
    , the minimum number of Backers necessary for leverage, to
    BmaxB_{max}
    , the maximum number of Backers necessary to achieve the maximum potential leverage,
    LmaxL_{max}
    :
L=Lmaxβˆ—max(0,bβˆ’Bmin)Bmaxβˆ’BminL=L_{max}*\frac{max(0, b-B_{min})}{B_{max}-B_{min}}
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