Coverage Ratio
Last updated
Last updated
While other AMM uses the number of tokens to determine the exchange rate, Wombat introduces its innovation of using an asset-liability management model to price assets.
The coverage ratio of an asset refers to the pool's ability to cover its debt payment. Each stablecoin in a pool has its coverage ratio.
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.
