Coverage Ratio

Through the concept of liabilities, ELEMENT is the first StableSwap to use coverage ratio in its dynamics to delineate equilibrium states. The coverage ratio is a crucial aspect of the ELEMENT protocol that must be maintained above a certain threshold to avoid defaults. For example, the coverage ratio prevents instances where users’ withdrawal requests exceed the number of assets in a token account.

Coverage Ratio = Asset / Liability

Fig 7: the coverage ratio for USDT is 0.909 (1,000/1,100), ETH 1.033 (31/30)

In ELEMENT, when a transaction happens, liquidity for the swap-from token increases while liquidity for the swap-to token decreases. ELEMENT also penalizes transactions that diverge from equilibrium to encourage transactions that move the system towards equilibrium through price slippage, a function of the coverage ratio.