# Coverage Ratio

Coverage ratio `r` defines the system's equilibrium states.

$$
Coverage Ratio = \dfrac{Asset}{Liability}
$$

Liquidity provided to the protocol would become liability. A higher coverage ratio indicates a lower default risk. The coverage ratio is an important parameter to our protocol since it needs to be maintained above certain level to avoid default.

If coverage ratio < 1, the token is under-covered. And if coverage ratio > 1, it is over-covered.&#x20;

![Example: Coverage Ratio of USDT and USD](/files/4zTXgDGFH1OHyqvwcc4l)

In Hummus Exchange, when a swap happens, liquidity (in the system pool) for the swap-from token increases, while liquidity (in the system pool) for the swap-to token decreases

Hummus Exchange encourages convergence towards equilibrium and penalizes the divergence from equilibrium. Therefore, we have established **price slippage** as a function of coverage ratio.

### Slippage Function

The slippage `g(r)` is designed to penalize actions that deviate coverage ratios of two pools and incentivize actions that converge two coverage ratios.

![Marginal Slippage (definition)](/files/bZesbl5OPsBkl7qQDVx4)

{% hint style="info" %}
`k` and `n` are fixed parameters to be specified. Our research found that `k = 0.00002` and `n = 7` could be a competent choice of parameters.
{% endhint %}

![Marginal Slippage (graph)](https://lh3.googleusercontent.com/m76mxAXwKBInZRP1M1_ihQ4hUniXSODpSlNvns7FfHh8cH3IFA2b8oVEw-oiTJQKdEzTu8A1WNNRf2elDvFZjL0h5BB3yw5m-tVfDS9LdN3RmZ-OfeWkKUwjJ_4FPTjCSNWjjPnT)

For example, if the coverage ratio is 80%, the marginal slippage is -0.08%. When a swap happens,  0.08% of the swap-to token goes to the pool.

###

### Incentives for Convergence of Coverage Ratio

Hummus Exchange encourages convergence of coverage ratio towards 1. When a user swaps from a pool where the coverage ratio is 80%, he brings the coverage ratio of the from-token to a more healthy position. Hence he is able to receive 0.08% incentives.


---

# Agent Instructions: Querying This Documentation

If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question.

Perform an HTTP GET request on the current page URL with the `ask` query parameter:

```
GET https://hummus-exchange.gitbook.io/hummus-exchange/concepts/coverage-ratio.md?ask=<question>
```

The question should be specific, self-contained, and written in natural language.
The response will contain a direct answer to the question and relevant excerpts and sources from the documentation.

Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.