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Protocol Safety Features
These ensure a secure environment for users within the protocol
It is crucial for the Carbon community to understand the underlying risk of each asset by
- Assessing the smart contracts security
- Understanding the risks of centralisation
- Understanding the market risks
Supply and Borrow caps restrict each asset to have upper bounds on supply and borrow (optional). This helps in reducing exposure to certain assets and mitigates infinite minting or price oracle manipulation risks.
Supply caps specify the maximum amount of an asset supplied to the Carbon money market.
Supply caps can be used to:
- Limit our money market’s exposure to riskier assets
- Limit the amount of volatility within the protocol’s collaterals
- Protect against infinite minting exploits
For example, if a new token with a low market capitalization is listed, its price could swing wildly (or drop to 0), causing liquidations that cannot be unwound in time due to the collateral price dropping rapidly.
A supply cap is an optional parameter, and its value will depend on the:
- On-chain liquidity of the asset
- Total volume of collateral assets in the market
By limiting the amount of such tokens that can be used protocol-wide, the total potential protocol deficit can be limited.
Borrow caps specify the maximum amount of an asset that can be borrowed from the Carbon money market.
Borrow caps can be used to:
- Prevent traditional and flash borrowing of an asset, which may be vulnerable to price exploits, resulting in market insolvency
- Restrict the amount of short interest that can be expressed on an asset
Listing a token with a low market capitalization may cause protocol instability if the amount of token borrowed and sold (i.e. short interest) is high relative to its circulating supply. This is because a downward spiral in price can occur, if the same token is being used as collateral and being liquidated as its price drops.
A borrow cap is an optional parameter, and the value will depend on the:
- On-chain liquidity of the asset
- Total volume of borrowed assets in the market
Isolation mode allows Carbon governance to list new, riskier assets as isolated assets.
How does isolation mode affect my borrowing power? Upon entering isolation mode, you will be limited to borrowing stablecoins.
Isolation mode can be used to limit the systemic risk of listing riskier assets.
Isolation mode limits an asset to:
- Only borrow isolated stablecoins
This restricts users using that asset as collateral to not be able to borrow non-stablecoin assets. This reduces liquidation risk as the market risk is only on the isolated asset price dropping and not on the borrowed asset price increasing.
- Only use a single isolated asset as collateral at a time
This avoids commingling of collateral, with the principal benefit being that in a mixed-collateral position, liquidators are forced to unwind this asset (removing contagion from the system) instead of avoiding it and seizing other “good” assets, leaving the risky asset behind.
Newly listed assets with (potentially) exploitable oracles can be listed under Siloed Mode to limit the overall risk of insolvency of the money market.
A siloed asset restricts the borrower to single borrows only (i.e. a user borrowing a siloed asset cannot borrow any other asset).