LTT Rating Methodology

Volatility – The price fluctuations of the tokens over time.

Higher volatility indicates that the token price can vary significantly, which increases the risk of large price drops. If the token used as collateral experiences a steep decline, the value of the collateral may no longer cover the principal of the LTT, increasing the risk of default. Therefore, LTTs backed by highly volatile tokens are typically assigned a lower credit rating to reflect the higher risk of collateral devaluation.

Market Capitalization – The total market value of a protocol’s outstanding tokens (token price × number of tokens).

Tokens with higher market capitalization typically represent larger, more established projects. These tokens tend to be more stable and less susceptible to dramatic price swings, making them more reliable as collateral. Larger projects are often seen as more resilient, so LTTs secured by high-market-cap tokens are viewed as safer and can receive a higher credit rating.

Trading Volume – The number of tokens traded over a specific period.

High trading volume indicates good liquidity, meaning the token can be easily bought or sold without significantly affecting the price. For LTTs, this is important because, in the event of liquidation, the collateral (token) can be sold quickly at a fair market price. If the trading volume is low, it may be harder to sell the token without causing a price drop, leading to potential losses when liquidating the collateral. LTTs secured by highly liquid tokens are thus considered lower risk and may have a better credit rating.

Bid-Ask Spread – The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask).

A narrow bid-ask spread reflects a liquid market where tokens can be traded with minimal cost and price slippage. If the spread is wide, it indicates a less liquid market, meaning that selling the collateral might involve significant losses due to the cost of trading or inability to sell at a fair price. A wide bid-ask spread could suggest difficulties in liquidating the token efficiently in case of LTT default, which could negatively affect its credit rating.