Credit Enhancement

Together, the Price Fluctuation rating, adjusted by the bonus of the LLTV rating, forms the Credit Enhancement rating. This Credit Enhancement acts as a safeguard for on-chain lending and investing activities against the credit risk of the underlying asset.

If there is a high probability of losses on the underlying asset, but the on-chain mechanisms ensure that these losses are absorbed, the risk is mitigated.

Conversely, in the case of a crypto asset with no underlying credit risk, the probability of losses will come from an aggressive configuration of the market parameters, such as allowing a high LLTV for a highly volatile asset.