This material is copyrighted by RareSkills. External distribution is prohibited.
Finance is about risk. What is your expectation of losing money versus gaining it? And how can you model it mathematically?
The most reliable principle we have is that past volatility is indicative of future volatility. By modeling volatility, we can estimate the chances an asset will fall below a certain price over a given time period.
This is useful when creating collateralized DeFi loans. As a lender, you want to know the probability that the borrower's collateral will not drop in value below the principal you lent him.
Overcollateralized lending is, on the surface, very simple:
A borrower posts collateral C of value V and borrows loan L of value V’ where V’ is a fraction of V.
In degen terms, you post $1,500 worth of Eth and can borrow $1,000 of some other currency, say the stablecoin USDC. We picked the numbers arbitrarily.