In this guide, I’ll be covering the basics of Safe management including what to keep an eye on, how to open a Safe, the risk of liquidation, and how to avoid it.
Creating an Account
When first landing on the H2O app, you’ll notice the following info below:
In order to create a Safe, users must first create an account (DSProxy contract). This is a prerequisite for all actions within H2O. **
Across DeFi, you’ll notice that a few projects follow the same standard such as MakerDAO and Balancer. The reasoning behind this is that the standard Ethereum wallet can only interact with one smart contract within a single transaction whereas a DSProxy can interact with multiple smart contracts within a single transaction. This improves the user experience when interacting with the protocol and allows for advanced management tools to be added in the future.
Opening a Safe
After the account is created, the next step is to open a Safe:
These statistics are vital to Safe management, so let’s break it down:
- Total OCEAN Collateral: The amount of $OCEAN a user wishes to deposit as collateral.
- Total H2O Debt: The amount of $H2O a user wishes to borrow as debt
- OCEAN Price: The current price of $OCEAN
- H2O Redemption Price: The price of $H2O within the protocol
- Collateral Ratio: The Safe’s collateral ratio based off of the inputted amount of collateral and debt (the ratio between the dollar value of your $OCEAN collateral in your Safe and its debt in $H2O)
- Liquidation Price: The $OCEAN price at which a user’s Safe will be liquidated
- Liquidation Penalty: This is a fee that is paid by Safe owners when liquidated.
Avoiding Liquidation
As you figure out the preferred amount of collateral and debt, it’s important to note that the minimum collateral ratio is 140%. If your Safe’s collateral ratio falls below this threshold, it will be liquidated and the liquidation penalty will be charged. One could also monitor the liquidation price to gauge their risk level.
Liquidation example: a Safe with $144.9 worth of $OCEAN collateral and $100 worth of $H2O debt gets liquidated with a 20% penalty. The owner would lose $120 worth of $OCEAN out of the Safe and have $24.9 of $OCEAN remaining, while keeping the $100 worth of $H2O debt.
Although it would be ideal to borrow at the lowest collateral ratio possible, users must be aware that it will increase your risk of liquidation. The price of $OCEAN is volatile, which means your collateral ratio can rise/fall quickly. Advanced DeFi users that plan to adjust to market conditions may be comfortable with a 200% collateral ratio, but less risky users should give themselves more room to work with (e.g. the high collateral ratio displayed above at 295%). In other words, if you aren’t prepared to adjust your collateral and debt when necessary, you may need to choose a higher collateral ratio for a larger safety net.
Gas Prices
Another key aspect to keep in mind is Ethereum’s gas prices, which have proven to skyrocket in times of market stress. When prices across crypto are dropping quickly, almost all users are trying to adjust their positions in DeFi — making gas fees more expensive than usual.
If you’re comfortable with paying higher gas fees during times of market volatility, then creating a Safe with a lower collateral ratio may work for you. If not, choosing a higher collateral ratio is likely the better option.
About H2O
H2O is the first non-pegged stable asset for the Web3 Data Economy, with a managed float regime that serves as a medium of exchange and unit of account in decentralized data marketplaces.
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