# β’οΈThe Variance Factor

"You have the X Factor, I have the Variance Factor. We are not the same."

The **variance factor** is the most important component of Itos's risk management system.

The **Delta factor** given by producers indicates how quickly the value of a position can change due to the nature of the asset, whereas the **Variance factor** represents how quickly the value of a token can change within the time it takes to liquidate.

The variance factor is a number greater than 1 and increases in value according to multiple factors such as:

The price volatility of the token.

The available liquidity relative to stables.

How fast liquidators typically respond to debts in this token.

How fast settlement is on the chain.

How stable gas fees are on the given chain.

How expensive gas is on the given chain.

## Utilization

We measure utilization like most protocols which is the value of the total debt divided by the value of the total collateral. We call the inverse of a portfolio's utilization the **Variance Gap**, in other words, the total collateral divided by the total debt. As long as this Variance Gap is greater than one, the portfolio can be liquidated without leaving the protocol with bad debt to resolve.

Therefore we set a minimum Variance Gap such that the portfolio is liquidated well before it reaches one. We achieve this by applying a variance adjustment to the every token balance reported by a **Record** to get virtual balances. Then as long as the virtual credit of a portfolio is larger than its virtual debt, the portfolio will remain solvent with a **Variance Gap **larger than one. The reason we do this on a per-token basis is so we can handle highly volatile, low-liquidity tokens while still giving safe, stable tokens the capital efficiency they deserve.

## Virtual Balances

We do **all of our accounting in virtual balances** and the liquidation size is determined in terms of virtual balances as well. Any credit position on Itos is considered collateral and for collateral balances we discount them by their variance factor to get **Virtual Collateral**. For example, is someone posts 1000 dollars worth of SOL as collateral and SOL has a variance factor of 1.04 (it's been volatile lately), then they have 1000 / 1.04 = 961 USD of virtual collateral.

**Virtual Debt** works the opposite way. Given a token debt balance, we add any token deltas from the same Record to it, and then multiply by the token's variance factor. So an ETH debt worth 100 USD, with a delta worth 10 USD, and a variance factor of 1.02 would give a virtual debt of 110 * 1.02 = 112.2 USD.

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