Providing liquidity to lending vaults entail various risks.
Bad Debt
🚨 Risk: In the case of extreme market volatility, the borrowing strategy vaults may become over-leveraged and trapped with debt they are unable to cover.
ℹ️ Mitigation: Our system of bots frequently and closely monitors several parameters such as a vault’s debt ratio as well as its borrowing interest to keep it within a healthy range. When a vault’s debt ratio is too high, the rebalancing strategy will reduce leverage as necessary.
Liquidity Withdrawal Risks
🚨 Risk: If a pool is undergoing a high level of utilization (high % of borrowing), there may be a delay for lenders when attempting to withdraw their deposited assets. This is primarily because borrowers may keep the borrowed funds for as long as they wish.
ℹ Mitigation: In cases of extremely high utilization of an asset (90%+), there will be a steep increase in both the borrowing costs and supply incentives, which would strongly encourage lenders to lend more assets and borrowers to reduce their debt, contributing towards the recovery of the supply-borrow utilization to the optimal range (80-90%).
Smart Contract Risks
🚨 Risk: While our smart contracts are undergoing audits (and even after the audits are complete), there could be unseen vulnerabilities. Furthermore, there is additional smart contract risk in the integrated 3rd-party platforms like the AMMs we use for our vaults.
ℹ Mitigation: Auditing smart contracts can decrease the chance of vulnerabilities. We also carefully vet any 3rd-party platforms used for our strategy vaults. We only work with platforms that have been audited with a good security track record.
A Final Note on Risk
One of our calling cards has always been “risk management”, so while we will always strive to reduce the risks for our investors, DeFi is still an industry with numerous dangers, both known and unknown. With this in mind, please invest responsibly with sufficient diversification so that you are only risking what you can afford to lose.