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Loss Provision Fund

SmartCredit.io’s Loss Provision Fund (LPF) protects lenders when liquidation proceeds do not fully cover a loan. It is funded by a portion of every borrower’s interest payments and backed by the SmartCredit.io platform.

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Key Takeaways

  • The Loss Provision Fund (LPF) is a safety reserve that covers lender losses if collateral liquidation does not fully repay a loan.
  • The LPF is funded by a small portion of every borrower’s interest payment; borrowers with a better trust score contribute less.
  • SmartCredit.io acts as the guarantor of the LPF.
  • The LPF is an extra layer of protection on top of the 5% liquidation-probability collateral calculation and the Positions Monitoring System.
  • The LPF is used only in adverse edge cases (extreme market crashes); it is not the primary protection mechanism.

The Loss Provision Fund (LPF) is SmartCredit.io’s reserve fund that protects lenders in the rare event that liquidation proceeds do not cover the full loan principal and interest.

How the LPF Is Funded

A small portion of each borrower’s interest payment is allocated to the Loss Provision Fund. The exact contribution depends on the borrower’s trust score:

  • Lower trust score - higher contribution to the LPF, reflecting higher lending risk.
  • Higher trust score - lower contribution to the LPF, as the borrower has a track record of on-time repayment.

This means the LPF self-accumulates continuously across all active loans on the platform.

When the LPF Is Activated

The LPF is activated when a liquidation shortfall occurs:

  1. A borrower’s collateral is liquidated.
  2. The proceeds from selling the collateral do not cover the full outstanding loan principal plus interest.
  3. SmartCredit.io draws from the LPF to pay the shortfall to the lender.

This scenario is uncommon by design. SmartCredit.io calculates collateral requirements for a 5% liquidation probability, and the Positions Monitoring System notifies borrowers before reaching the liquidation threshold. However, in extreme market crashes where collateral prices drop faster than the system can react, the LPF serves as the backstop.

LPF vs. Other Lender Protections

The LPF is the last line of defence. The primary protections are:

  1. Over-collateralization - all loans require collateral above the liquidation ratio.
  2. Probability-based collateral calculation - positions start with a 5% liquidation probability.
  3. Positions Monitoring System - borrowers are notified at 15% liquidation probability and can add collateral.
  4. SmartCredit.io liquidation bots - automated liquidation before the position becomes insolvent.
  5. Loss Provision Fund - covers any remaining shortfall after liquidation proceeds.

SmartCredit.io is the guarantor of the LPF, meaning the platform backs the fund if it were ever to be depleted.

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