Risk Groups
The Bottlenecks of Zest V1
Like Aave v3, Zest v1 used collateral-centric risk parameters: each collateral type had a single LTV, liquidation threshold, and penalty applied to every debt asset.
This created a bottleneck because debt assets don’t share the same risk. USDC against sBTC is low-risk, USDh carries peg and liquidity risk, and borrowing volatile assets like STX is far riskier.
Since v1 couldn’t distinguish between them, parameters had to be set conservatively for the worst case, leading to low borrow caps and broadly constrained capital efficiency.
Zest V2: Redefining Risk
In v1, each collateral asset used one global risk profile.
In v2, risk is defined per collateral–debt pair through Risk Groups. Each pair gets its own LTV, liquidation triggers, and penalties, calibrated to how those two assets interact.
This solves the core v1 issue: one asset’s parameters constrained all borrowing. In v2, every pair is tuned independently, enabling higher LTVs for correlated assets, safer limits for volatile pairs, higher borrow caps, and easier onboarding of new assets.
Risk Groups let the protocol reflect real market behavior. For instance, borrowing USDC against sBTC is no longer treated like borrowing STX against sBTC, and materially reduce unnecessary liquidations.
Risk Groups Deep Dive
Risk Group defines the relationship between a collateral asset and a debt asset. Each group specifies:
Which collateral assets can be used
Which debt assets can be borrowed
Maximum borrowing capacity (LTV ratio)
Liquidation thresholds
Liquidation penalty parameters
Rather than having universal parameters for each collateral type, V2 recognizes that different asset pairs have different risk profiles and should be treated accordingly.
How Risk Groups Determine Borrowing Capacity
Your Risk Group determines your maximum borrowing power through its LTV (Loan-to-Value) ratio.
LTV represents the maximum debt you can have relative to your collateral value:
Example:
Collateral: $10,000 worth of sBTC
Risk Group: sBTC → USDC (60% LTV)
Maximum Borrow: $10,000 × 0.60 = $6,000 USDC
LTV Tiers by Asset Pairing
Different asset combinations receive different LTV ratios based on their risk characteristics:
High LTV (60-80%): Low-Risk Pairings
Stable collateral → stable debt (sBTC → USDC)
Same-asset borrowing (STX → STX)
Highly correlated assets (STX → stSTX)
These pairings have predictable price relationships and high liquidity, allowing higher borrowing capacity without increasing liquidation risk.
Moderate LTV (40-50%): Mixed Stability
Volatile collateral → stable debt (STX → USDC)
Stablecoin cross-borrowing (USDC → USDh)
These pairings involve some volatility but maintain reasonable stability, requiring moderate caution.
Conservative LTV (20-30%): Higher Risk
Volatile collateral → volatile debt (STX → sBTC)
Mixed volatile assets (different price drivers)
When both collateral and debt can experience significant independent price movements, lower LTVs protect against cascading liquidations.
Risk Group Examples
1) sBTC → USDC/USDh
This is one of the safest pairings in the protocol:
sBTC is a stable, liquid Bitcoin proxy
USDC/USDh are stablecoins pegged to USD
Price relationship is relatively predictable
High liquidity enables efficient liquidations if needed
Use Case: Bitcoin holders seeking stable borrowing power without selling their BTC exposure.
2) STX → USDC/USDh
A moderate-risk pairing:
STX experiences price volatility
USDC/USDh remain stable
Requires buffer against STX price drops
Lower LTV protects against sudden volatility
Use Case: STX holders needing stablecoin liquidity for spending or opportunities while maintaining STX exposure.
Summary
Risk Groups transform lending by recognizing that not all asset pairs have the same risk profile. By assigning LTV ratios and liquidation parameters appropriate to each collateral-debt combination, Zest V2 enables:
Higher borrowing capacity for safe pairings
Appropriate caution for volatile combinations
Transparent and predictable borrowing limits
Protection against dangerous position transitions
Understanding your Risk Group and its parameters is essential for effective borrowing and risk management on the protocol.
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