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Market Risk Assessment

DeFi protocol have some risk factors:
  1. 1.
    Security
  2. 2.
    Governance
  3. 3.
    Oracle
  4. 4.
    Market
This document will focus on market risk.

Defining Market Risks

There are four primary sources of market risk within the protocol:
  1. 1.
    Extreme downward price movement: Shocks to market prices of collateral that cause the contract to become insolvent due to under collateralization
  2. 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. 3.
    Cascading liquidations: liquidations lower external market prices which in turn lead to further liquidations (i.e. a deflationary spiral)
  4. 4.
    Slashing of the safety module: Insolvency of the safety module due to extreme events where multiple collateral types concurrently fail to be liquidated