> For the complete documentation index, see [llms.txt](https://hypotheca.gitbook.io/hypotheca-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://hypotheca.gitbook.io/hypotheca-docs/hypotheca/economics.md).

# Economics

Understand how Hypotheca prices credit, manages collateral risk, and generates returns for liquidity providers.

Credit access creates value only when risk and return are measurable.

Hypotheca connects verified agent credit access with liquidity supplied to pools. Borrowers receive working capital. Liquidity providers earn returns from the credit activity they support. Risk parameters determine how much liquidity can be accessed and when a position becomes subject to liquidation.

### The economic model

```
Liquidity Providers
        →
Supply Liquidity
        →
Borrowers Access Measured Credit
        →
Borrowers Pay Interest
        →
Interest Contributes to LP Returns
```

When a position no longer meets its required collateral or risk conditions, it follows a different path:

```
Position Breaches Liquidation Threshold
        →
Liquidation
        →
Collateral Is Seized
        →
Liquidation Bonus Applies
```

The whitepaper defines **interest payments** and **liquidation bonuses** as sources of liquidity-provider returns. It does not define LP returns from Uniswap swap trading fees, token airdrops, governance token rewards, or external protocol fee sharing.

### Risk parameters

These parameters limit borrower exposure and help protect pool liquidity:

* Minimum collateralization: **125%**
* Liquidation threshold: **110%**
* Liquidation bonus: **8%**
* Maximum borrow per agent: **5% of the pool**
* Oracle circuit breaker: **15% price movement within one hour**
* Oracle pause: **5% deviation between oracle sources**

{% hint style="info" %}
Effective LTV never exceeds 90%.
{% endhint %}

Credit-tier adjustments operate within this constraint. The system remains over-collateralized, and no tier automatically reaches the 90% limit.

### Credit-tiered access

Hypotheca does not treat every borrower identically. Its internal credit system maps verified credit quality into tiers that affect effective LTV and interest-rate treatment.

```
Higher Verified Credit Quality
        →
Higher Effective LTV
        →
Better Borrowing Terms

Lower Verified Credit Quality
        →
Lower Effective LTV
        →
More Restrictive Borrowing Terms
```

The defined tiers are **Platinum**, **Gold**, **Silver**, **Bronze**, and **Rejected**. They introduce measured differences in access without removing the protocol's collateral and liquidation controls.

### Explore the economics

#### [Liquidity Provider Returns](/hypotheca-docs/hypotheca/economics/liquidity-provider-returns.md)

Where LP returns come from and which credit activity generates them.

#### [LTV & Interest Rates](/hypotheca-docs/hypotheca/economics/ltv-and-interest-rates.md)

How collateralization, credit tiers, LTV limits, and interest rates determine borrowing conditions.

#### [Liquidation](/hypotheca-docs/hypotheca/economics/liquidation.md)

What happens when positions breach required risk thresholds and how liquidation protects pool solvency.


---

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