Collateral Risk Management

Risks introduced by assets accepted as collateral is a major source of exposure of users of StableUnit products.

Exposure (also Risk Exposure) is a general term in Risk Management, often applied to measure the potential financial loss inherent to a business system, component of such system, transaction, or portfolio etc.

At StableUnit, we apply the term Risk Exposure to measure the extent of a maximum possible loss across different kinds of risk.

Collateral-related Risk Exposure.

Applied in the context of StableUnit, each new asset accepted as collateral introduces a unique risk exposure up to a maximum amount of outstanding debt backed by such collateral.

It is important to note that while each collateral is introduces its unique exposure (for example Exposure from token ABCD is $1M + Exposure from token XYZN is $2M) to otherwise non-unique supply of a single, fungible stablecoin ($3M of debt).

In other words debt is backed by different assets with different debts (similar to a non-fungible tokens) but all denominated in a single, fungible stablecoin, with 100% of token holders of such stablecoin sharing the combined risk with each other regardless which collateral was used to mint a stablecoin they hold. This effectively socializes the individual risks of all its collateral-specific debt under a single umbrella of shared stablecoin:

Example: Total Collateral Exposure = Collateral ABCD Exposure $1M + Collateral XYZN Exposure $2M = $3M.

Therefore it is crucial for the Risk Management Framework to be effective in identifying, analyzing and treating risk of each collateral in isolation, and as a portfolio.

Please note that in this section of Risk Framework we work primarily with the risks introduced by collaterals with the objective to ensure system solvency. The risks of custody of collateral on deposit are in scope but covered by another category of Risk Framework - Technical & Smart Contract Risks). .