⁉️How it works

Surge protocol design

Current lending protocols require price feeds to assess collateral sufficiency and liquidations. Instead of using price feeds, Surge achieves the same purposes by gauging the changes in liquidity.

To gauge the changes in a pool's liquidity, Surge introduces:

• Algorithmic Collateral Ratio: A dynamic collateral ratio as a function of utilization rate over time as an alternative to a function of price feeds. (hereunder referred to as Collateral Ratio).

• Surge Threshold: A utilization rate threshold at which the pool collateral ratio gradually starts to fall.

Below is a chart that illustrates the change in the collateral ratio based on the utilization rate of a hypothetical Surge pool:

Collateral ratio vs. utilization rate over time (Hypothetical pool)

In the hypothetical pool above, the pool starts with the maximum collateral ratio of 50:1, meaning for every 1 unit of collateral tokens, a borrower is allowed to borrow up to 50 units of loan tokens. This collateral ratio is independent of the prices of both tokens.

Suppliers start removing liquidity to avoid bad debt if the collateral token value decreases in relation to the loan token. As the utilization rate of the pool rises above the surge threshold (in this case, 80%), the pool enters the surge state and its collateral ratio starts to fall at a constant rate over time.

If the pool collateral ratio falls under the collateral ratio of any active borrowers, they become liquidatable. In the chart above, Borrower 1's collateral ratio is 35, while the pool collateral ratio falls to 30. Borrower 1 becomes liquidatable. However, Borrower 2 avoids liquidation by maintaining more collateral per token borrowed.

As the pool's utilization rate returns below the surge threshold, it enters the recovery state and its collateral ratio starts to rise back to the original maximum collateral ratio.

However, if the utilization rate never returns back below the surge threshold, the collateral ratio will continue to fall to 0, liquidating all active borrowers. This ensures that the pool maintains sufficient liquidity to allow suppliers to exit, especially at times of high withdrawal demand.