Market Risk Assessment

DeFi protocol have some risk factors:

1. Security

2. Governance

3. Oracle

4. Market

This document will focus on market risk.

Defining Market Risks

There are four primary sources of market risk within the protocol:

1. Extreme downward price movement: Shocks to market prices of collateral that cause the contract to become insolvent due to under collateralization

2. Asset illiquidity and liquidator inaction: Loss of liquidity in an external market place, leading to a liquidator being disincentivized to liquidate defaulted collateral

3. Cascading liquidations: liquidations lower external market prices which in turn lead to further liquidations (i.e. a deflationary spiral)

4. Slashing of the safety module: Insolvency of the safety module due to extreme events where multiple collateral types concurrently fail to be liquidated