Haircut Risk Parameters

Haircut risk parameters are defined percentage discounts applied to the market value of an asset when it is used as collateral. Because market prices are volatile, protocols do not value collateral at its full market price to protect against sudden drops.

A haircut ensures that the protocol holds more collateral value than the debt it secures. For example, if an asset has a 20 percent haircut, only 80 percent of its value is counted toward the collateral requirement.

These parameters are essential for maintaining the safety margin of a protocol during periods of high market turbulence. They are usually set based on the historical volatility and liquidity of the asset.

Assets with higher volatility are assigned larger haircuts to provide a greater buffer against price declines. These parameters are often subject to governance votes to ensure they remain appropriate for current market conditions.

They are a primary tool for risk managers to balance capital accessibility with systemic safety.