# Coverage Ratio

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 $$r\_x$$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.

{% embed url="<https://medium.com/wombat-exchange/coverage-ratio-what-is-it-and-why-is-it-healthy-for-your-deposits-36663d18bb15>" %}


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