Supply and borrow caps

Assets listed on the RelDeFi need to have liquid secondary markets. Rapid changes in the market environment could trigger a liquidity shortage that must be managed with proactive risk management.

Imposing caps on the amount of assets supplied, borrowed and posted as collateral is the first line of defence to protect users and the protocol itself from potential liquidity/solvency issues.

Assets listed on RelDeFi will be initialized with several caps that best fit the current level of liquidity in the DeFi ecosystem. As liquidity grows, caps will be periodically reviewed and lifted if conditions permit. This allows Lend to manage liquidity / solvency risks consistently with the overall DeFi market.

• Supply cap: a limit on the amount of assets that can be deposited in a lending pool

• Borrow cap: a limit on the amount of assets that can be borrowed in a lending pool

• Collateral cap: a limit on the amount of assets that can be posted as collateral in the RelDeFi

The table below summarizes which caps are applicable for each asset tier

Asset tier	Supply cap	Borrow cap	Collateral cap
Isolated	Yes	Yes	Not applicable
Cross	Yes	Yes	Not applicable
Shared	Yes	Yes	Yes
Nominal	Yes	Not applicable	Yes
Restricted	Not applicable	Not applicable	Not applicable

It is worth mentioning that the supply and borrow caps do not necessarily need to be applied in conjunction as they can work on a standalone basis too.

The application of each cap has different implications in terms of risk management:

• Supply cap: by restricting the amount of assets that can be supplied to a lending pool, we limit the asset's liquidity migration from DEXes to lending markets which could cause undesirable consequences if such assets were massively borrowed. Furthermore, applying the supply cap on a standalone basis exposes lenders to the yield upside and the related illiquidity risk deriving from a high utilization scenario. Applying a borrow cap in conjunction with a supply cap would mitigate the returns and risks of such scenario for lenders.

• Borrow cap: by restricting the amount of assets that can be borrowed from a lending pool, we ensure that liquidators can perform liquidations in an orderly and profitable manner. Furthermore, by applying a borrow cap on a standalone basis, borrowers can take advantage of the lower cost of borrowing. At the same time, the lower yield on the supply side could discourage lenders to provide liquidity for such assets. Applying a supply cap in conjunction with a borrow cap would mitigate the advantages and risks of such scenario for borrowers.

• Collateral cap: by restricting the amount of assets that can be posted as collateral in RelDeFi we ensure that liquidators can perform liquidations in an orderly and profitable manner. On the other hand, the application of a collateral cap would restrict the borrowing volume on RelDeFi