What is the Debt in Front Indicator? (NEW FEATURE)

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By Connor
Estimated reading: 3mins
debt in front

A game-changing new feature has arrived on the Liquid Loans dApp.

It’s called the Debt in Front indicator, and this free tool is a must-use for anyone who wants to prevent redemptions and keep all of the $PLS in their Vault.

Here’s how understanding this key indicator can save you from a headache down the road.

What is Debt in Front?

The "Debt In Front" (DIF) indicator is a new tool that is native to the Liquid Loans protocol. It lets you estimate how safe your Vault is from the risk of redemptions compared to other Vaults in the ecosystem.

How it Works

1. Assessment of Position. The Liquid Loans ecosystem continuously calculates and updates the collateral ratio of each active Vault.

2. Ordering. Vaults are then ordered from the riskiest (with the lowest collateral ratio) to the safest (with the highest collateral ratio).

3. Calculation of Debt In Front. The DIF indicator sums up the total USDL debt of all the Vaults that are more vulnerable than yours.

4. Redemption Risk. Vaults with a lower collateral ratio, which are therefore higher on the list, are at a larger risk of being redeemed against. When a redemption occurs, the process targets these riskier Vaults first.

Having a high DIF score means there is a significant buffer of other Vaults that are more likely to be redeemed than yours. This offers you a great way to get reassurance about your Vault's position in the pecking order. 

This tool also allows you to stay agile. You can adjust the collateral ratio in your Vault to better protect yourself at times when you have a lower DIF score, protecting you from the risk of being hit by a redemption. 

Why Should You Avoid Redemptions?

The function of the Debt in Front (DIF) indicator is to help users protect their Vaults from full or partial redemptions. 

Most redemptions occur because users set too low of a collateral ratio when opening their Vault. Typically, this is because they want to be more “capital efficient” by using less $PLS when they take out USDL. Ironically, this often ends up being far less capital efficient, since your Vault is far more likely to get redeemed against.

Remember, just because you can have a collateral ratio of 110%, it doesn’t mean you should.

While your Vault getting redeemed against is actually not the end of the world, there are still several reasons why you might want to avoid it happening to you.

The first and most obvious reason is that you can lose a portion of the $PLS equivalent to your USDL debt when your Vault gets redeemed against.

In cases where the market price of $PLS is higher than the value it's being redeemed against, you incur a loss compared to selling your coins on the open market.

Since many users lock $PLS in a Vault as a form of leverage or investment strategy, redemptions could disrupt your strategic positioning. This is made worse by the fact that redemptions are an automatic process handled by the Liquid Loans protocol, so you might end up being caught off guard. As a consequence, you could have a less-than-timely reaction to your Vault being redeemed against. 

For these reasons, avoiding redemptions is often the best course of action. The most effective way to lower the risk of your Vault being redeemed against is simply by maintaining a higher Individual Collateral Ratio (ICR). 

With this new Debt In Front (DIF) tool, you can also use your DIF score to better mitigate risk and avoid redemptions altogether.

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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.

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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.

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