Health Neutral
Health neutral portfolios are optimized for liquidation-prevention. The health meter of these portfolios remain at a constant level, independent of individual price changes, minimizing the chance of liquidation.
A health neutral portfolio is perfect for investors who:
Have a mid-long-term vision of an asset's potential
Want to minimize the need of managing collateral
Mainly want to benefit from high yields in specific pools and farms
Example strategy: sAVAX
In this strategy we are utilizing the sAVAX -> AVAX peg to create a position that minimizes liquidation risk. In order to be health neutral, all assets in a portfolio should consist of the same- or pegged assets. In this case we:
By depositing AVAX and swapping it to an AVAX-pegged asset, we make a directional bet of AVAX appreciating in price.
Expected returns
If you deposit $1000 AVAX collateral, and borrow 4.5x AVAX with a 7% interest rate, farming it as sAVAX with a 15% farming interest rate, your APY =
Since you are exposed to the AVAX price, your APY in dollars decreases if AVAX lowers in dollar-value. Should AVAX lose 99.99% in value immediately after you open your strat (keeping 0.01% of its value), it decreases your farming rewards and your initial by 99.99%, leading to an APY of:
This while during the whole drop, your health will remain the same. On the other hand, if AVAX appreciates 100% in value, essentially doubling it, the APY increases to:
Tripling your initial collateral, while keeping your health the same.
The Health Meter
The health meter is a representation of your collateralization ratio. In this strategy, the collateralization ratio will not change with price movements. As an example:
You deposit $1000 AVAX and borrow $4500 AVAX, swapping it all into sAVAX. Your collateralization ratio is (1000/4500=) 22%. If AVAX and sAVAX double in price, your collateral increased to $2000 and the value of borrowed funds increased to $9000. Your collateralization ratio is still (2000/9000=) 22%.
No matter what any asset does in price, your collateralization ratio will always remain 22%, keeping your health at a stable level. This is what makes this strategy health neutral.
What to check?
Important note
The example strategy assumes sAVAX holds its peg to the AVAX price. Read more about sAVAX in Benqi's documentation.
Prices of pegged assets may slightly fluctuate based on oracle price data. You might want to leave a health buffer to account for that.
While your health does not significantly change, you are exposed 1x to the deposited price. AVAX price going up or down does affect the dollar value you'll be able to take as profit.
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