Risks

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Last updated 4 years ago

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Risks

We discuss below key risks associated with using Akita Finance

Risks to Lenders

Loss of Capital:

Risk: the risk of debt accrued by underwater positions in case liquidators do not liquidate in time during a period of high market volatility
Mitigation: we have taken a cautious approach in setting key parameters to ensure a large buffer; we also have provided enough incentive to liquidators to call and liquidate applicable positions; hence, we believe this scenario is very unlikely to occur

Timing of Asset Return:

Risk: delay in getting deposited asset back in case of the pool’s high level of utilization; please note that farmers can borrow the funds as long as they like and there is no fixed term of when the funds must be returned
Mitigation: we use a triple-slope interest rate to optimize for 90% fund utilization. The steep increase in interest rate beyond the 90% utilization should incentivize more lenders to deposit funds and borrowers to return outstanding loans, bringing the pool back to an optimal level

Risks to Yield Farmers

Impermanent Loss (IL):

Risk: risk of (impermanent) capital loss from asset rebalancing in the Automated Market Maker ("AMM") pool
Mitigation: impermanent loss is not unique to Akita Finance; it is common among all yield farming and AMMs; while we currently do not yet have a way to mitigate IL, users can choose to yield farm asset pairs that have high correlations to minimize potential IL. For more information on IL, you can start with this .

Liquidation:

Smart Contract Risks

PreviousStrategies NextAKITA Tokens

Last updated 4 years ago

Was this helpful?

Risks to Lenders

Loss of Capital:

Risk: the risk of debt accrued by underwater positions in case liquidators do not liquidate in time during a period of high market volatility

Mitigation: we have taken a cautious approach in setting key parameters to ensure a large buffer; we also have provided enough incentive to liquidators to call and liquidate applicable positions; hence, we believe this scenario is very unlikely to occur

Timing of Asset Return:

Risk: delay in getting deposited asset back in case of the pool’s high level of utilization; please note that farmers can borrow the funds as long as they like and there is no fixed term of when the funds must be returned

Mitigation: we use a triple-slope interest rate to optimize for 90% fund utilization. The steep increase in interest rate beyond the 90% utilization should incentivize more lenders to deposit funds and borrowers to return outstanding loans, bringing the pool back to an optimal level

Risks to Yield Farmers

Impermanent Loss (IL):

Risk: risk of (impermanent) capital loss from asset rebalancing in the Automated Market Maker ("AMM") pool

Mitigation: impermanent loss is not unique to Akita Finance; it is common among all yield farming and AMMs; while we currently do not yet have a way to mitigate IL, users can choose to yield farm asset pairs that have high correlations to minimize potential IL. For more information on IL, you can start with this .

Liquidation:

Risk: if you open a leverage yield farming position, Akita Finance borrows a base asset for you to farm; you run the risk of being liquidated if price of the borrowed asset appreciates against the farming token pair. Your position will be liquidated when the Debt Ratio (debt / position value) reaches the Liquidation Debt Ratio. See Pool-Specific Parameters for more information

Mitigation: this can be mitigated by using a lower leverage level, and also monitoring positions during volatile market conditions and closing them before hitting the liquidation parameters.