# Collateral Module

The DAII Collateral Module in the BitStable protocol is a foundational component designed for the creation of DAII stablecoin through a process of over-collateralization. This module ensures the stability and balance of DAII by utilizing other assets as collateral, primarily focusing on the ORDI asset in its first phase.

The DAII Collateral Module in the BitStable protocol is a foundational component designed for the creation of DAII stablecoin through a process of over-collateralization. This module ensures the stability and balance of DAII by utilizing other assets as collateral, primarily focusing on the ORDI asset in its first phase.

## **Over-**Collateralization **and Liquidation**

### Stake and liquidation formula: 

`Initial`` ``Collateralization Ratio =value of collateral / DAII debt.`

### Minimum Collateralization Ratio :

Also known as **Liquidation Ratio. The Liquidation Ratio** is a critical parameter in vault management for digital assets. When a vault's collateral level falls below this predefined threshold, it becomes susceptible to liquidation. This means that if the collateralization drops under the minimum required level, the assets within the vault are auctioned to repay the outstanding debt and cover any associated liquidation expenses.

For instance, let's consider a scenario where the collateralization ratio is set at 500% for staking Ordi tokens. Assuming the value of 1 Ordi is equivalent to 100 USDT, staking 1 Ordi would yield 20 DAII. This ratio is calculated as follows: 100 USDT / 20 DAII equals 5, which, when expressed as a percentage, is 500%. This high collateralization ratio is a risk mitigation measure, ensuring substantial coverage for the borrowed amount in volatile market conditions.

When the market price of ORDI is at 50 USDT, the Collateralization Ratio is: 50/20=2.5 (250%)

However, if the ORDI price declines to 20 USDT, the Collateralization Ratio adjusts accordingly. In this scenario, the ratio is computed as 20 USDT (value of 1 ORDI) divided by 20 DAII, yielding a ratio of 1 or 100%. (This is a critical threshold as it approaches the liquidation level). 

Under BSSB's Collateralization module for ordi, the initial Minimum Collateralization Ratio is set at 125%, indicating the lowest permissible liquidation ratio before a vault is at risk of liquidation. 

For comparison, MUBI’s Minimum Collateralization Ratio (Liquidation Ratio) is established at 200%, reflecting a more conservative approach towards risk management in collateralized debt positions."

## **Benefits of Over-Collateralization**

* Over-collateralization contributes to the stability of the DAII stablecoin, enhancing trust among users in the token’s value.
* It mitigates the risk of under-collateralization, particularly important in the volatile cryptocurrency market.
* The mechanism ensures that DAII can withstand market fluctuations, maintaining its peg and value integrity even during market downturns.

## **Implementation in BitStable**

* Initially, BitStable’s Collateral Module will accept only ORDI as collateral. This decision aligns with the protocol’s strategy to introduce a stable and trusted asset as the primary collateral in the early stages.
* The protocol plans to expand its collateral base in subsequent phases, incorporating other assets to diversify risk and enhance the platform's resilience.

## **Impact of Collateral Module**

* The Collateral Module is the cornerstone of DAII’s stability. By ensuring that DAII is always over-collateralized, BitStable maintains the token’s stability and reliability.
* The transparent and rigorous approach to collateralization instills confidence in users, fostering trust in the BitStable ecosystem.

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