Debt Ceilings

Debt ceilings are one of the most important risk management tools in Tren Finance. The concept of a debt ceiling is used to cap the maximum amount of debt that can be issued against a specific type of collateral. The debt ceiling is shown as the total trenUSD on each module.

Asset Specific

Each type of collateral typically has its own debt ceiling. Riskier assets have lower trenUSD and more mature assets enjoy a larger supply of trenUSD to be minted. This limit is set by both governance decisions and the in house risk management team of Tren Finance based on the perceived risk and liquidity of the collateral asset, among other factors.

Diversified Risk

Without debt ceilings, a protocol could become overly concentrated in a single type of collateral, especially if it becomes popular or seen as highly profitable. This could lead to systemic risks if that particular asset faces issues like regulatory crackdowns, fundamental security flaws, or other problems that could affect its value.

Unprofitable price manipulation

If a CDP protocol allows very high or no limits on debt creation for a particular asset, an attacker might manipulate the price of a low liquidity asset (both the collateral and the borrowed asset). By inflating the price of the collateral artificially through wash trading or other techniques, they could borrow significantly more against it than its actual market value. Once the manipulation stops, the price could collapse, leading to losses for the protocol when the position is liquidated at a value that doesn't cover the debt. A debt ceiling limits the total exposure of the protocol to such price manipulations as we can control the maximum value at risk per module. With full control over the value at risk we are able to set debt ceilings so that the cost of manipulation is higher than the gain from exploiting the protocol, securing the protocol