Wombat Exchange
Wombat Exchange

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
of an asset refers to the pool's ability to cover its debt payment. Each stablecoin in a pool has its coverage ratio.
coverageRatiox(rx)=CashxLiabilityxcoverageRatio_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.