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Collaterialization and C-Ratio

In Horizon Protocol, all zAssets must maintain collateralization with HZN. HZN is staked, and zUSD is minted at a 600% Collateralization Ratio (C-Ratio) ($6 worth of HZN to mint $1 zUSD). Maintaining this C-Ratio is necessary to qualify for weekly rewards.
The C-Ratio is designed to ensure adequate backing for synthetic assets during HZN price fluctuations. The target C-Ratio of 600% may change through community governance.

Debt

Understanding debt is crucial for reward distribution on Horizon Protocol. When users mint zUSD, they borrow zUSD with HZN as collateral. This essentially creates an interest-free debt equivalent to the amount of minted zUSD. Users must later return (‘burn’) their zUSD to reclaim their staked HZN. User rewards are calculated weekly based on their debt share relative to the global debt in the Horizon Protocol network.
To help keep track of your debt, Horizon Protocol provides a page to help users track their current debt from staking HZN.

Managing Debt

Your C-Ratio fluctuates based on 2 factors:
  • Price changes of HZN.
  • Price changes of synthetic assets on Horizon Protocol.
The global debt pool consists of all synthetic assets held by users, denominated in zUSD. It increases when traders profit (synthetic asset values rise) and decreases when they incur losses (synthetic asset values fall).
Initially, with only zUSD available, your C-Ratio was affected only by HZN price changes. For example, with $100 zUSD minted using $600 HZN at a 600% collateralization ratio and a 50% HZN price drop, your C-Ratio would be 300%. You'd need to burn $50 zUSD or stake an additional $300 HZN to repay your debt, but no additional loss occurs.
Now that with the Horizon spot exchange and Futures both in place, users can hold or long/short various zAssets with fluctuating values. Consequently, users must account for the combined value of all their zAssets. If the total value of a user's zAssets increases, their C-Ratio rises accordingly. Conversely, if the total zAsset value decreases, their C-Ratio decreases as well.

C-Ratio and Debt

With the introduction of various zAssets in Trade, part of Horizon Protocol, it's important to grasp that your debt obligation to the system is proportional. This means that the system monitors your debt as a percentage of the global debt. Consequently, when prices of assets in the global debt portfolio change, your debt obligation changes accordingly. For instance, if you account for 1% of the global debt with a $1,000 debt, and the average price of all assets in the global portfolio increases by 10% (which also means the global debt increases by 10%), your debt obligation will also rise to $1,100. If the synthetic assets you hold do not appreciate by 10%, you will incur a loss, assuming that the global debt doesn't subsequently decrease.
Let's take an example:

Scenario:

  1. 1.
    John and Adam both mint $100k zUSD. The total network debt is $200k, with John and Adam responsible for 50%.
  2. 2.
    John buys zBNB with his $100k and Adam holds zUSD.
  3. 3.
    In this example, BNB increases by 50% increasing John's holdings to $150k. This price fluctuation increases the total debt to $250k.
  4. 4.
    John and Adam are still responsible for 50% of the total debt each. This means John and Adam both owe $125k. When John's zBNB is taken into consideration, he has profited $25k. Even though Adam still has the same zUSD position size of $100k - the debt he owes increased by 25% resulting in a $25k loss.
To manage this risk, you can either replicate the global portfolio or hedge your position by holding some inverse assets, which are synthetic assets that allow you to bet against the market, thereby offsetting volatility in both bullish and bearish directions.
It's crucial to grasp that when other zAssets are added to the synthetic asset lineup alongside zUSD, simply staking HZN as collateral and holding minted zUSD effectively means you are taking a short position on the global portfolio, especially if the portfolio includes appreciating synthetic assets.

Managing C-Ratio and Rewards Summary

C-Ratio Maintenance:

  • To qualify for rewards, maintain a C-Ratio above 600%.
  • If your C-Ratio is within a few percent of 600% (e.g., 595% or higher), you can still claim rewards.
  • If your C-Ratio falls below 600%, you'll need to either buy more HZN or burn zUSD to restore it.
  • The Target C-Ratio (600%) may change based on community governance decisions.

Reward Schedule:

  • Rewards are calculated and distributed weekly, every Friday.

Claiming Rewards:

  • Visit the Horizon Protocol Website and go to the Claim section.
  • Click "Claim Now" to collect your weekly rewards in HZN.

Claim Window:

  • Rewards will be available for claiming for 7 days. Unclaimed rewards will be forfeited.

HZN Reward Escrow:

  • Claimed HZN rewards are escrowed for 1 year.
  • During this period, you cannot transfer or sell them.
  • You can re-stake them or use them to manage your C-Ratio.