Risk Pricing

Overview

Stormbit prices risk explicitly through a proprietary model that accounts for LTV, duration, and collateral volatility. Unlike traditional DeFi protocols that rely on utilization curves or governance-set parameters, Stormbit calculates APR directly from measurable risk factors.

Traditional pool-based lending creates inefficiencies: rates depend on borrowed asset utilization rather than actual collateral risk, and the true cost of lending is hidden in liquidation events. Stormbit addresses this by pricing risk upfront through a formula-based approach.

Premium & Delta

Stormbit's risk pricing builds on two foundational concepts.

Premium

The premium is the upfront fee borrowers pay to compensate lenders for default risk and market volatility over the fixed loan term. It functions like insurance—reflecting the probability and potential impact of default while giving borrowers complete cost visibility before committing.

Premiums are priced dynamically based on market volatility, loan duration, and collateral risk profile. Lenders can use the premium to hedge their exposure through options or perpetual futures.

Delta

Delta represents "the sensitivity of the loan's value to price changes in the collateral asset." It measures how much a lender's exposure changes per unit move in collateral price—higher LTV means higher delta and more sensitivity to price swings.

Risk underwriters assess delta exposure to ensure premiums cover not just expected default but also price movement risk. Lenders may dynamically hedge using derivatives, or accept the delta risk as part of their expected returns.

Parameter	Impact on Delta
Higher LTV	More sensitive to price drops
Longer duration	More time for adverse moves
Volatile collateral	Larger expected price swings
Correlated assets	Reduced sensitivity (stETH/ETH)

APR Factors

Stormbit's APR calculation considers three primary inputs:

LTV (Loan-to-Value) — Higher LTV means less collateral buffer and increased risk for lenders. Borrowers requesting higher leverage pay correspondingly higher rates.

Duration — Longer loan terms expose lenders to more potential price volatility. The model prices this time-based risk into the APR.

Collateral Volatility — Assets are classified into tiers based on historical price volatility, liquidity depth, oracle reliability, and market cap. More volatile collateral results in higher APR.

Asset Classifications

Correlated assets like wstETH/ETH receive lower risk classification because depeg events are rare and typically recover. RWAs such as T-bills benefit from stability and regulatory oversight. LP tokens carry higher risk due to impermanent loss combined with underlying asset volatility.

Design Rationale

Stormbit chose formula-based pricing for transparency, consistency, and predictability. Borrowers understand how rates are determined, identical risk profiles receive identical pricing, and there's no governance lag or sudden parameter changes.

LTV directly correlates with lender loss probability. Higher LTV means smaller price drops can result in underwater positions, justifying the compensation lenders require.

Comparison to Traditional Protocols

Stormbit rates reflect a different value proposition than variable-rate lending pools:

1. No liquidation during term—lenders take more risk, requiring compensation

2. Fixed rate—no variable rate volatility for borrowers

3. Explicit risk pricing—true cost of credit, not hidden in liquidation events

4. Certainty premium—predictability has value

Stormbit makes sense for users who need certainty, expect volatility, run short-duration strategies, or have defined timelines for capital deployment.

Lender Hedging

Lenders can manage delta exposure using the premium collected. Common approaches include buying put options for defined risk protection, delta hedging with perpetual futures for active management, or accepting collateral at a discount if default occurs.

See Lend for comprehensive hedging strategies.