# 5.5.9. Collateral Model of Savings Groups

#### Collateral

In a savings group, the participant randomly selected by the smart contract-based algorithm in a certain period can receive the savings payment as a result of depositing a certain amount of collateral on the platform.&#x20;

The collateral to be deposited to the savings group associated Nexspecto smart contracts is calculated by multiplying the total payment that the participant has to make until the relevant savings group ends, that is, the participant's total remaining debt, by a rate determined by the platform.&#x20;

The individuals selected in the lottery must deposit a certain amount of collateral based on the type of asset (BTC, ETH). The collateral to be deposited is obtained by multiplying the remaining debt by the collateral coefficient associated with the type of collateral. For example, the collateral coefficient for ETH is 1.20. If a person has a remaining debt of 5,000 USDT, they would need to deposit at least 6,000 USDT (5,000 USDT x 1.20) as collateral.

While determining the collateral multiplier/rate, it will be taken into account that the collateral to be paid by the participant must be higher than the remaining debt at a certain rate (at a rate that guarantees the remaining payments).&#x20;

Which assets the participant can deposit as collateral will be determined by the platform. While stable crypto asset-based collaterals are prioritized, Nexpecto may also allow collateral to be deposited with volatile crypto assets like BTC, ETH.&#x20;

#### Collateral Liquidation

In collateral deposits made in volatile assets such as BTC, ETH, a higher collateral rate can be envisaged, and in case these assets lose value, the minimum collateral amount that the participant should have according to its liabilities will be calculated and the participant's collateral will be gradually liquidated in certain tranches.&#x20;

The liquidation of collateral is essential to maintaining the stability and security of the system. It is expected that the value of the collateral will always be a certain amount higher than the remaining debt; otherwise, the collateral deposited to secure the system will be transformed into the fundamental coin types. This transformation is determined by equal values known as the "Nexspecto Health Factor (Nhf)."

Nexspecto health factor = (Collateral Amount x Collateral Adequacy Ratio x Nexspecto Coefficient) ​/ Remaining Debt

* Collateral Amount is the deposited collateral.
* Each collateral type has its own liquidation threshold value. Additionally, each collateral type has a specific Nexspecto coefficient.
* Nexspecto Coefficient is a fixed coefficient determined based on the type of collateral.

For example, if the total debt is $200,000, and the value of ETH is $2,000, the required collateral amount would be 100/0.8= 125 ETH (equivalent to $250,000).

Nhf= (250,000 USDT x 0.8 x 1.04) / 200,000 USDT= 1.04&#x20;

When the Nexspecto Health Factor falls below a certain threshold, collateral is converted into fundamental coin types based on the following conditions:

* 1 > Nexspecto health factor > 0.95 => 50%
* Nexspecto health factor < 0.95 => 100%

Nexspecto Coefficients are 1.07 for BTC and 1.04 for ETH.

During the collateral redemption process, to expedite the transaction and ensure security, the project owner incurs a 5% penalty.

Example Redemption Process and New Health Factor Calculation:

Suppose the value of ETH drops to $1,900. The collateral value, therefore, decreases to $237,500 (125 ETH x $1,900).

Nhf= (237,500 USDT x 0.8 x 1.04) / 200,000 USDT= 0.986

Since 1 > Nhf >0.95 only 50% of the collateral will be redeemed. Thus, $100,000 worth of collateral will be redeemed with a 5% penalty, resulting in $105,000 equivalent in ETH (55.26 ETH).

After redemption, the remaining collateral is 125−55.26=69.74 ETH (equivalent to $132,506).

Upon recalculating the Nhf: (132,506 USDT x 0.8 x 1.04) / 100,000 USDT = 1.10

Since the Nhf is now above 1, the system will continue with the remaining collateral.

In the event that the asset deposited as collateral depreciates rapidly and somehow cannot be liquidated when it needs to be liquidated, and the participant fails to fulfill its payment obligation, the liquidation process of the participant, which is detailed in the section "Liquidation Process of Saving Group Participant" (see 5.5.7.), will be initiated.&#x20;
