Market Risk Assessment
DeFi protocol have some risk factors:
This document will focus on market risk.
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