Market & Collateral Risk

Market and collateral risk

The value and liquidity of the assets in a market can move against a position. This page describes the risks that come from the market itself rather than from the code.

Collateral can fall in value

Collateral assets are volatile. A sharp drop in the price of the collateral lowers the health factor and can push a position into liquidation quickly. Crypto assets can move far in a short window, including outside normal hours, and a position that looks comfortable can reach its liquidation threshold within minutes. See Positions and Account Health.

Correlated assets can fall together

Clusters group assets that tend to move together so they can share margin. The same correlation that makes a cluster efficient works against the position in a downturn, because the assets backing it can decline at the same time rather than offsetting each other. Concentration in correlated collateral can amplify a loss. See Clusters and Pooled Markets.

Liquidity can disappear

A market depends on available liquidity. If a large share of supplied assets is borrowed, suppliers may be unable to withdraw until borrowers repay or new supply arrives. On the other side, thin liquidity can leave a position unable to be liquidated at a fair price, which contributes to bad debt. See Interest Rates.

A market can be left with bad debt

In severe conditions, the value of a position's collateral can fall below its debt before liquidation completes. When that happens, liquidation does not fully cover the debt and the market is left with a shortfall. Bad debt can affect suppliers in the affected market. Caps and conservative parameters reduce how often this occurs, and a sufficiently extreme move can still produce it. See Liquidation Risk.

Stablecoin and peg risk

The loan asset in the launch market is a stablecoin. A stablecoin can lose its peg. A de-peg changes the real value of debt and supply in the market and can disrupt liquidations that assume a stable price.

Loan-to-value limits, liquidation thresholds, and caps are tools for managing these risks. They cap exposure within set bounds. A severe enough market move can still produce a loss beyond what those bounds anticipate.