# Risk Controls

### Risk framework

hBTC is designed to operate within a **pre-defined, rules-based risk framework**. Risk management is automated and parameter-driven; the protocol does not rely on discretionary trading decisions. All risk controls are observable, threshold-based, and enforced through systematic mechanisms.

The primary risk control domains are **leverage**, **delta exposure**, and **interest spreads**, supported by a dedicated **reserve fund**.

<figure><img src="https://2201013687-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Fxp26OjT5H1o55M1QMDI4%2Fuploads%2Fk5GwvSvkUAlcUaiDYF4S%2FScreenshot%20from%202025-12-27%2011-16-20.png?alt=media&#x26;token=91286825-51e2-4ffd-bd1c-b916dfcce2a3" alt=""><figcaption></figcaption></figure>

#### 1) Leverage Control&#x20;

**Objective**\
Maintain a healthy money market position and reduce liquidation risk by operating within conservative Loan-to-Value (LTV) bounds.

**Current Thresholds**

* **Cap:** 51%
* **Target:** 50%
* **Floor:** 49%

**Mechanism**\
An automated off-chain service continuously monitors LTV and adjusts positions by opening or closing exposure when thresholds are breached, rebalancing toward the target.

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## Liquidation Parameters

**Zest protocol's** current liquidation parameters:

* **Liquidation threshold**:&#x20;
  * Paritial: 70% LTV
  * Full: 75% LTV
* **Liquidation penalty**: 5-10%
  {% endhint %}

{% hint style="warning" %}
If liquidation were to occur, the protocol may incur losses up to or exceeding the liquidation penalty, depending on market conditions and execution dynamics.\
\
\&#xNAN;*For additional details, see the* [*Market Risk disclosures*](https://docs.hermetica.fi/hbtc/risk-disclosures/market-risk)*.*
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#### 2) Delta Control

**Objective**\
Maintain BTC exposure within a tightly defined delta-neutral range to minimize directional risk.

**Current Thresholds**

* **Cap:** 1.001
* **Target:** 1.0000
* **Floor:** 0.999

**Mechanism**\
When delta thresholds are breached, the protocol rebalances exposure via **Hermetica mint and redeem swaps** between stablecoins and sBTC, restoring exposure toward the target.

#### 3) Interest Spread Control

**Objective**\
Manage strategy exposure based on observed interest spread regimes, reducing or exiting positions when spreads become persistently unfavorable.&#x20;

**Current Thresholds**

* **Maximum negative spread:** 2 consecutive days of negative spread
* **Redeploy criteria:** 2 consecutive days of positive spread

**Mechanism**\
When negative spread threshold is breached, positions are closed or reduced. Strategy deployment resumes only after redeploy criteria are met.

#### 4) Reserve Fund

**Objective**\
Maintain a dedicated reserve fund that to buffer negative reward periods, subject to available capitalization.&#x20;

**Current Thresholds**

* **Reserve rate:** 5% of daily rewards
* **Minimum reserve capitalization:** 10 bps
* **Redeploy criteria:** 2 consecutive days of positive spread

**Mechanism**\
A defined portion of daily rewards (the reserve rate) is allocated to the reserve fund. If capitalization threshold is breached, positions are closed or reduced. Strategy deployment resumes only after redeploy criteria are met.

{% hint style="info" %}
The reserve fund is designed as a risk mitigation mechanism, **not as a guarantee against loss.**

*For additional details, see the* [*Reserve Fund documentation*](https://docs.hermetica.fi/hbtc/reserve-fund)*.*
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