Collateral haircuts decide how much of your deposit the protocol actually counts. It sounds simple, but the usual static haircuts treat risk like it never changes, which just isn’t true. Falcon Finance takes a different route, using dynamic algorithms that react to what’s really happening in the market, especially when things get rough.
Think of a haircut as a safety cushion—something that covers you against price swings, thin liquidity, sudden correlations, or problems selling assets fast. When the market’s calm, smaller haircuts mean you can use more of your capital. But when chaos hits, those same small haircuts leave the system exposed. Falcon’s dynamic approach lets these buffers grow or shrink on their own, depending on what the risk signals say.
Volatility is front and center here. When prices get jumpy, haircuts go up to protect against bigger drops before assets even get liquidated. But Falcon doesn’t just stare at the latest price swings. It looks for patterns—volatility tends to linger, and the system anticipates that.
Liquidity matters just as much. An asset might look big on paper, but if you can’t sell it quickly on-chain, you’re in trouble. Falcon actually checks how much you can really sell without crashing the price, not just what the charts say. If liquidity dries up, haircuts go up.
Correlation risk is tricky too. Assets might seem unrelated most of the time, but in a crash, they start moving together. Falcon watches these relationships and increases haircuts when assets stop acting independently. That way, you don’t get blindsided by fake diversification.
Falcon doesn’t just yank haircuts around, though. Quick, sharp changes can spark panic and trigger a wave of liquidations. So the system smooths out adjustments, slowly shifting haircuts over time and capping how much they can move in a single block or epoch. This gives users room to adjust without freaking out.
Another thing—it’s not a simple on/off switch. Haircuts tighten fast when risk ramps up, but they only loosen slowly when things calm down. It’s a cautious approach that stops the system from relaxing too soon after a rally.
Governance still sets the boundaries, but the day-to-day changes run automatically. The algorithms handle the heavy lifting, which keeps things moving quickly and avoids emotional decisions during wild markets.
And Falcon doesn’t keep any of this under wraps. Users can see current and future haircut levels right up front, so there are fewer nasty surprises and more trust in the system. Predictability is just as important as getting the numbers right.
All told, these dynamic haircut algorithms let Falcon Finance keep an eye on risk all the time—not just at set intervals. The protocol adapts on the fly, balancing capital efficiency and safety, pulling back when things get risky and only loosening up when stability really sticks around.
