Collateral Index Fund

Over time the Malt system will accrue collateral in many different tokens dynamically according to the distribution of TVL. So in some sense the collateral held by the protocol will track something like an index fund for the whole market.

• Diverse Asset Base: As the protocol accrues various assets through its operations, its collateral naturally diversifies.

• Market-Driven Allocation: The distribution of collateral roughly tracks with the TVL of each pool, creating a market-driven index.

• Risk Management: The protocol's risk factor system allows for nuanced management of different assets in the collateral basket.

• Upside Potential: The protocol and it's users can benefit from overall market growth while maintaining stability of the Malt stablecoin.

Asset Risk Factors

To allow the system to control the risk of collateral volatility it is possible to set risk factors for each asset. These allow the protocol to dampen the effect of volatility on the collateral.

Having this system in place means the protocol will hold more value than it is quoting as collateral. This opens on some additional possibility to produce cashflow in a favorable way for the protocol.

Turning excess collateral into cashflow

For the sake of example say we start off with 100k USDC in collateral and 100k Malt supply. Some time later we have 5k in ETH as well. So we now have 105k collateral backing 100k Malt. Perhaps we only count 50% of ETH towards collateral. So Malt will quote 102.5k collateral. Say that ETH moves 4x. Malt now quotes 110k collateral backing 100k Malt but we actually have 120k collateral in reality. The quoted collateral ratio is 110%.

The protocol could in this scenario (for example) decide to use 10k USD worth of ETH to buy back 10k Malt. This would reduce the Malt supply by 10k to 90k while only impacting the quoted collateral by 5k to 105k. This has increased the quoted collateral ratio from 110% to 116.6%. This is a way to convert excess uncounted collateral into a shrinking of the Malt supply and corresponding increase in collateral ratio. The protocol could leave it there and just hold onto the collateral ratio improvement, or it could decide to use the new collateral ratio to mint more Malt to produce cashflow for the protocol.

Dampening downside

We have just seen how increases in underlying collateral can be converted into collateral ratio increase or more cashflow using the risk factors on assets. The risk factors on assets also protect the protocol from downside by ensuring quoted collateral value has less volatility than the underlying collateral itself. If the market for an asset drops by 40% but the protocol only values 50% of that asset then the quoted collateral value only drops by 20%.

Factor along with that the fact that Malt will have a majority of its collateral in stablecoins (at least initially) mitigates much of the risk of market volatility on the collateral value. Of course, this still has the risk of the stablecoins themselves losing value but that is mitigated by the protocol's ability to diversify its collateral base over time as the collateral ratio increases. The collateral moving similarly to a "crypto index fund" also improves the diversification away from stables over time.