Liquidity Risks

Lending

For lenders, the main risk lies in the assets they lend out, which typically carry more risk than the collateral posted by borrowers. If a lender holds oTokens that represent a particular asset, they may face a temporary inability to redeem these oTokens for the underlying asset, especially when the utilization rate hits 100%. This scenario poses a risk, particularly for those who haven't factored it into their lending strategy.

Additionally, in rare cases, network disruptions or extreme price fluctuations can lead to liquidation failures, potentially resulting in a loss of funds for the lender. If liquidators are unable to cover a borrower's debt adequately, or if the borrower's collateral significantly devalues, lenders might not fully recover their original deposits. In events of liquidation leading to bad debt, the protocol automatically pauses the affected risk pools, and the administrator will manage the distribution of losses from relevant loan positions.

Borrowing

Borrowers mainly face risks associated with short-term price fluctuations and the availability of lending liquidity. A sudden drop in lending liquidity can put borrowers at risk, especially those nearing a 100% utilization rate. Such borrowers may see a steep increase in accrued borrowing interest, adding to their financial burden.