Solvency Invariants

Solvency invariants are the fundamental mathematical rules that define the healthy state of a lending protocol or margin-based trading platform. They dictate that the total value of collateral held by the protocol must always exceed the total value of outstanding liabilities plus a safety buffer.

If a transaction or price movement causes the system to violate these invariants, the protocol must trigger liquidations to restore balance. These invariants are the core of risk management in DeFi, ensuring that lenders are protected against borrower default.

They are often enforced through smart contract assertions that check collateralization ratios at every step of the lending and borrowing lifecycle. By strictly maintaining these rules, protocols can provide automated, trustless credit services.

Failure to enforce these invariants leads to insolvency and systemic risk.