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Risk framework

hBTC is designed to operate within a pre-defined, rules-based risk framework. Risk management is automated and parameter-driven; the protocol does not rely on discretionary trading decisions. All risk controls are observable, threshold-based, and enforced through systematic mechanisms. The primary risk control domains are leverage, delta exposure, and interest spreads, supported by a dedicated reserve fund.

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1) Leverage Control

Objective
Maintain a healthy money market position and reduce liquidation risk by operating within conservative Loan-to-Value (LTV) bounds. Current Thresholds
  • Cap: 51%
  • Target: 50%
  • Floor: 49%
Mechanism
An automated off-chain service continuously monitors LTV and adjusts positions by opening or closing exposure when thresholds are breached, rebalancing toward the target.

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Liquidation Parameters

Zest protocol’s current liquidation parameters:
  • Liquidation threshold:
    • Paritial: 70% LTV
    • Full: 75% LTV
  • Liquidation penalty: 5-10%
If liquidation were to occur, the protocol may incur losses up to or exceeding the liquidation penalty, depending on market conditions and execution dynamics.
For additional details, see the Market Risk disclosures.

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2) Delta Control

Objective
Maintain BTC exposure within a tightly defined delta-neutral range to minimize directional risk. Current Thresholds
  • Cap: 1.001
  • Target: 1.0000
  • Floor: 0.999
Mechanism
When delta thresholds are breached, the protocol rebalances exposure via Hermetica mint and redeem swaps between stablecoins and sBTC, restoring exposure toward the target.

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3) Interest Spread Control

Objective
Manage strategy exposure based on observed interest spread regimes, reducing or exiting positions when spreads become persistently unfavorable. Current Thresholds
  • Maximum negative spread: 2 consecutive days of negative spread
  • Redeploy criteria: 2 consecutive days of positive spread
Mechanism
When negative spread threshold is breached, positions are closed or reduced. Strategy deployment resumes only after redeploy criteria are met.

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4) Reserve Fund

Objective
Maintain a dedicated reserve fund that to buffer negative reward periods, subject to available capitalization. Current Thresholds
  • Reserve rate: 5% of daily rewards
  • Minimum reserve capitalization: 10 bps
  • Redeploy criteria: 2 consecutive days of positive spread
Mechanism
A defined portion of daily rewards (the reserve rate) is allocated to the reserve fund. If capitalization threshold is breached, positions are closed or reduced. Strategy deployment resumes only after redeploy criteria are met.
The reserve fund is designed as a risk mitigation mechanism, not as a guarantee against loss.For additional details, see the Reserve Fund documentation.