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.
1) Leverage Control
Objective Maintain a healthy money market position and reduce liquidation risk by operating within conservative Loan-to-Value (LTV) bounds.
Current Thresholds
Cap: 52.5%
Target: 50.0%
Floor: 47.25%
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.
Liquidation Parameters
Zest protocol's current liquidation parameters:
Liquidation threshold: 80% LTV
Liquidation penalty: 10%
If liquidation were to occur, the protocol may incur losses up to or exceeding the liquidation penalty, depending on market conditions and execution dynamics. For additional details, see the Economic Risk disclosures.
2) Delta Control
Objective Maintain BTC exposure within a tightly defined delta-neutral range to minimize directional risk.
Current Thresholds
Cap: 1.0025
Target: 1.0000
Floor: 0.9975
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.
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.
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.
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