Pool Accounting

Total Pool Value (totalAssets)

Total pool value is represented using totalAssets.

This value is calculated using the following equation:

$$\begin{align} \nonumber totalAssets = cash + \sum{assetsUnderManagement_{strategies}} \end{align}$$

where:

$$\begin{align} \nonumber assetsUnderManagement = \sum\Big({outstandingPrincipal_{loan}} + {outstandingInterest_{loan}}\Big) \end{align}$$

where:

$$\begin{align} \nonumber outstandingInterest(t) = accountedInterest + issuanceRate \times (t - domainStart) \end{align}$$

The relationship between the Pool, PoolManager, and LoanManagers regarding value representation is shown in the diagram below.

Unrealized Losses

unrealizedLosses is an accounting variable that represents a "paper loss". The Pool Delegate and Governor both have the ability to "impair" a strategy and represent a paper loss in the pool. unrealizedLosses is also incremented during an active collateral liquidation in a Loan. unrealizedLosses is used to prevent large liquidity events in situations where it is public knowledge that a Pool will incur a loss in the future.

In the case the unrealizedLosses > 0, there are two exchange rates that are maintained, one for deposits and one for withdrawals. This is to prevent malicious depositors from taking advantage of a situation where they know that paper loss will be removed. Consider a situation where there is a single loan outstanding for $900k with $10k of outstanding interest, and there is 100k of cash in the pool. The totalSupply of LP tokens is 1m. In this situation, the effective exchange rate is:

$$\large \begin{align} \nonumber exchangeRate &= \frac{totalAssets}{totalSupply} \\ \nonumber exchangeRate &= \frac{900000 + 100000 + 10000}{1000000} \\ \nonumber exchangeRate &= 1.01 \end{align}$$

After impairing the loan, unrealizedLosses gets set to 910k. Now, with unrealizedLosses considered, the exchange rate becomes:

$$\large \begin{align} \nonumber exchangeRate &= \frac{totalAssets}{totalSupply} \\ \nonumber exchangeRate &= \frac{900000 + 100000 + 10000 - 910000}{1000000} \\ \nonumber exchangeRate &= 0.1 \end{align}$$

Without the two exchange rate model, a depositor could deposit $1m at a 0.1 exchange rate and get 10m shares. Once unrealizedLosses was removed, their shares would be worth $10.1m.

For this reason, two exchange rates are maintained during an unrealizedLosses scenario. This accomplishes two things:

1. Discourages withdrawals - LPs are incentivized to wait until the strategy either:

2. Defaults - Cover and collateral will increase exchange rate

3. Pays back - The original exchange rate is restored.

4. Discourages deposits - During a scenario where a default is imminent, it is in future LPs' best interest to wait until the borrower either defaults or pays back their loan before entering the pool.