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Collateral Leverage Points (CLP) are an internal accounting numeric value having no resale or redemption value. They are used internally by certain banking and investment enterprises and institutions in the Galactic Milieu as a user-interface aid in presenting to users a view of the leverage available to them based upon their collateral.

Because DeVCoins are deliberately intended to be typically of lower value per coin than most other blockchain-based coins, Collateral Leverage Points are often denominated in DeVCoins.

Because Collateral Leverage Points are a purely internal accounting unit, and in order to ensure they remain a purely internal accounting unit, Collateral Leverage Points have no resale or redemption value. This feature serves to discourage attempts to remove them from the system or appropriate them for some other use.

To illustrate the concept, let us assume an enterprise has set its users leverage to 50%. This value means that each user has available to them Collateral Leverage Points equal to 50% of the value, as accounted in Collateral Leverage Points, of their collateral.

In the above, the “collateral” of each user is a locked-in portfolio of assets. Locked in, in this context, means that the portfolio designated as “collateral” is locked in to the Leverage Points system; assets in that portfolio cannot be removed from that portfolio unless or until the user has no “outstanding” Collateral Leverage Points. (That basically means they have to “pay off” their leverage debt before they can reclaim the assets the bailed in as “collateral”.)

Collateral Leverage Points typically serve as one of two main internal currency units, both of which are denominated in the same units (that is, they are interpreted as being of equivalent value). What sets Collateral Leverage Points apart from the similarly-denominated internal “standard currency” is the lack of cash-out value. There is typically no external currency or asset in which Collateral Leverage Points may be redeemed.

Consider for example an institution which uses DeVCoins as its standard internal currency. Typically every asset for which it maintains markets will include a market denominated in DeVCoins. Its users are thus able to purchase any asset on those markets using DeVCoins or tokens redeemable for DeVCoins (such as digiDeVCoins (dDVC). If the institution uses the Collateral Leverage Points method of providing its users with leverage, its Collateral Leverage Points will typically be measured in terms of DeVCoins, so that if assets valued at 1000 DVC are commited to a user's “collateral” portfolio the number of Collateral Leverage Points made available to them will be 1000 times the leverage (thus, 500 if leverage is set to 50%).

Collateral Leverage Points are distinct from, and separate from, the asset or currency they use as their measure or unit of value because they are not a distinct and separate asset but merely an internal guesstimate or tool used internally by the enterprise or institution to control risk. They serve as part of the mechanisms by which the enterprise or institution tries to protect itself against the volatility of value in the assets in which it and/or its users trade.

It is usual when using the Collateral Leverage Points approach for all assets obtained by use of such points to be placed automatically in the “collateral” portfolio. That is, Collateral Leverage Points cannot normally be used to purchase assets for any portfolio other than one's “collateral” portfolio. This serves to protect and strengthen the value of that portfolio, but also leads one to question what value such a portfolio has to its user. On the face of it what we have so far is a portfolio that is only useful for increasing its own holdings. How then do such holdings serve the user?

The answer to this question must be found in the relative valuations of the assets in the portfolio on one side versus the outstanding Collateral Leverage Points balance on the other. Usually this is implemented by requiring all outstanding Collateral Leverage Points (that is, the total number of such points that have been “spent”) to be paid back before permitting any assets to be transfered out of the “collateral” portfolio.

Let us walk through an example. Consider again a user of a 50% leverage enterprise or institution who has bailed into their “collateral” portfolio assets whose current market value is computed to be 1000 DVC. Because leverage is set at 50%, this allows them 500 CLP with which to obtain more assets for their “collateral” portfolio. Let us assume they “spend” that 500 CLP, thereby obtaining additional assets (for their “collateral” portfolio) the value of which is computed to be 500 DVC, thus bringing the computed value of their “collateral” portfolio to 1500 DVC.

It is important to note at this point that by “spending” CLP the user is in effect accruing a debt. They have in effect been “loaned” 500 DVC with which to increase the value of their “collateral” portfolio. They are, accordingly, effectively in debt by that amount. Thus part of the implementation of Collateral Leverage Points includes accounting such “debt”. It is recorded as “outstanding Collateral Leverage Points”. It is these “outstanding” CLP that must be “paid off” before any assets may be withdrawn from the “collateral” portfolio.

The Collateral Leverage Points method of providing leverage to users provides features that are not provided by some other methods of providing leverage. In particular, it does not provide leverage for ”shorting” assets. It is intended to assist users in acquiring assets they think will gain in value, not to assist users in driving down the value of assets they think will lower in value. Thus it tends to be particularly popular in civilisations that admire the building of value more than they admire the destruction of value.

Returning to our example user, note that their “collateral” portfolio having now a computed value of 1500 DVC implies that the number of Collateral Leverage Points available to them should be computed to be 750 for the next cycle. It is important to note that the “outstanding” amount counts against that total, thus that they will actually have 250 available and 500 outstanding. The cycle period is usually set to some convenient local timespan, such as a local day or week or month, by the enterprise or institution. Obviously the shorter the cycle timespan the faster the users can grow their “collateral” portfolio by the simple expedient of spending their non-outstanding Collateral Leverage Points on more assets for their “collateral” portfolio.

We must now consider what happens if the assets in the “collateral” portfolio fall in value. Obviously the lower value of the assets results in a lower amount of Collateral Leverage Points. If the value falls low enough that the user has a negative number of “available” (non-outstanding) Collateral Leverage Points that is equivalent to a margin call; assets must be sold, but here we encounter a snowball effect: selling assets from the collateral portfolio results in even less CLP, which results in more assets having to be sold and so on.

This is where each institution's policies regarding which are sold - the priority or ordering of what to sell - can be a part of what sets one enterprise or institution apart from another. If you care how the implementation chooses what to sell from your collateral portfolio in such a situation, it might be wise to examine carefully each enterprise or institution's implementation of this aspect of Collateral Leverage Points.


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