Potential Risks

Centralization Risks

Some tokens (e.g.) have increased risks of centralization (i.e. potentially being exposed to a single point of failure in their governance).

The counterparty risks (i.e. single point of failure and trust factor) for these assets are too high, and hence, cannot guarantee the solvency of the protocol. Accordingly, these assets are only limited for use as collateral under Isolation Mode.

On the other hand, some decentralized tokens are not battle-tested and hence cannot be used as collateral.

This is why it’s important for users to think through possible centralization risks before listing an asset on the Carbon money market via governance.

Market Risks

Liquidity Risks

Liquidity (calculated using the on-chain liquidity and trading volume) is key for the money market’s liquidation process.

Liquidity risks can be mitigated through the supply and borrow caps and liquidation threshold parameters (i.e., the lower the liquidity, the higher the incentives).

Volatility Risks

Price volatility can negatively affect the value of collaterals.

To cover liabilities and safeguard the solvency of the protocol, the risk of collaterals falling below the borrowed amounts can be mitigated through the amount of coverage required via the Loan To Value (LTV).

Price volatility also influences the margin required for liquidators to make a profit.

Least Volatile Assets

  • Stablecoins

  • ETH

  • WBTC

These assets have the highest LTV (70 - 80%), and highest liquidation threshold (75 - 88%).

Most Volatile Assets

Assets that are the most volatile typically have low LTVs of 35% and 40%.

To protect our users from price volatility (e.g. a sharp drop in price), which may lead to under-collateralization and potentially liquidation, the Liquidation Thresholds are set at a lower percentage.

Market Capitalization Risks

Market Capitalization (or MCAP) represents the total value of all the coins that have been mined. It's calculated by multiplying the number of coins in circulation by the current market price of a single coin.

Market cap helps to capture the size of a market, which is key when it comes to liquidating collateral.

While assets with smaller market capitalizations are generally exposed to less risk, they are often less mature and hence more volatile. On the other hand, a higher market cap typically signals a more developed ecosystem (i.e. higher liquidity, which facilitates liquidations with less impact on prices).

To mitigate the risk that a high impact on prices may have on the liquidation of assets with smaller markets, the liquidation parameters are adjusted (i.e., the smaller the market cap, the higher the incentives).

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