Slippage-aware Collateral Factor

Omnipair uses a Slippage-Aware Dynamic Collateral Factor derived from the xy=k invariant, designed to minimize manipulation and insolvency in General Automated Market Maker pools by dynamically adjusting borrowing limits based on loan size, liquidity and market conditions.

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The risks with fixed Collateral Factors

1. Slippage Bypass via Borrowing

If AMM slippage exceeds the remaining margin (1 - CF), users can borrow instead of swap to bypass the price curve:

• By borrowing until liquidation, users drain one side of the pool.

• This breaks the AMM invariant (xy=k) and leads to complete one-sided liquidity exhaustion.

2. EMA Lag Exploitation

If liquidation logic uses delayed EMA prices, users can:

• Borrow at inflated EMA valuations before the EMA adjusts to falling spot prices.

• LPs incur losses while the protocol remains unaware of the solvency gap.

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Dynamic Collateral Factor

These critical vulnerabilities are solved by continuously adjusting the collateral factor based on real-time AMM conditions, slippage, and market volatility.

Technical Derivation:

The slippage-aware collateral factor is directly derived from the constant-product (xy=k) AMM equation:

$$Y = V \cdot \left(1 - \frac{Y}{R}\right)^2$$

Where:

• $( Y )$: Maximum borrowable amount

• $( V )$: Collateral value at EMA price

• $( R )$: AMM reserves of the borrowed token

Using a simplified approximation:

$$Y \approx V \cdot \left(1 - \sqrt{\frac{V}{R}}\right)$$

Refined accuracy is then achieved through Newton-Raphson iterations.

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Pessimistic CF for EMA Lag Protection

To mitigate oracle-lag risk:

$$\text{CF}_{\text{pessimistic}} = \min\left( \text{CF}_{\text{base}}, \frac{P_{\text{EMA}}}{P_{\text{spot}}} \cdot \text{CF}_{\text{base}} \right)$$

This enforces the solvency condition:

$$P_{\text{spot}} \geq P_{\text{EMA}} \cdot \text{CF}$$

It ensures that spot prices must always back the borrow amount, even if EMA lags during sharp price declines.

Final Borrow Limit Calculation:

Each borrow request dynamically computes:

let borrow_limit = pessimistic_cf_bps * user_collateral / BPS_DENOMINATOR;
let remaining_limit = borrow_limit - user_current_debt;

This ensures safety across all pool conditions, recalculating in real-time on every:

• borrow()

• repay()

• swap()

• liquidation check

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Advantages of this approach:

• Prevents AMM Slippage Exploits: Borrow limits adjust dynamically, preserving AMM invariants.

• EMA Exploit Mitigation: Tightens borrow conditions during significant EMA-spot divergence periods.

• Enhanced Stability: Continuous real-time adjustments significantly reduce insolvency risk.

• Robust Liquidity Protection: Protects pool reserves from draining due to manipulated borrowing strategies.

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Summary

Omnipair’s Slippage-Aware Dynamic Collateral Factor replaces static risk assumptions with real-time, on-chain math that adapts to liquidity depth and volatility. It protects both borrowers and liquidity providers from insolvency risks, mispricing attacks, and one-sided liquidity drain.