Undercollateralized Loan
An undercollateralized loan is a form of credit where the borrower (Asset Manager) receives a loan that exceeds the value of their posted collateral. Unlike overcollateralized loans common in DeFi, undercollateralized loans rely on dynamic portfolio management, risk assessment, and active liquidation mechanisms to manage credit risk.
Undercollateralized Loans on Arkis
Within the Arkis ecosystem, undercollateralized loans are made possible through the Margin Account, a smart contract-based abstraction that allows Asset Managers to borrow and trade beyond the value of their collateral. This works due to:
Real-time portfolio margining: The Arkis Margin Engine calculates a Risk Factor across all positions and assets within the Margin Account.
Controlled access: Asset Managers can only trade with whitelisted tokens on whitelisted protocols.
Collateral monitoring & liquidation: If the account's health deteriorates, the system can automatically liquidate assets to protect lender capital.
Example: Margin Trading = Undercollateralized Loan
Deposit: An Asset Manager deposits $100 worth of ETH as collateral into their Margin Account.
Borrow: Arkis provides a 5x leverage, allowing the Asset Manager to borrow $400 worth of USDC, bringing their total exposure to $500.
Trade/Yield: The Asset Manager then trades the borrowed USDC on a whitelisted DEX or deposits it into a whitelisted yield protocol like Pendle or Curve.
Monitoring: The Arkis Margin Engine continuously tracks the portfolio. If the risk level exceeds predefined thresholds, the system will automatically reduce positions or liquidate the account to protect the Liquidity Pool.
While traditional DeFi relies on overcollateralization to reduce risk, Arkis enables safe undercollateralized loans by combining onchain transparency, strict whitelisting, and real-time risk monitoring. In this context, undercollateralized loans function as margin trading, offering capital efficiency without compromising security.
Last updated