Asset Risk
Supplying liquidity on Iron Finance is a low-risk way to earn interest on your funds. However, as the case is with all DeFi lending platforms, it is not entirely risk-free. A lender should consider the following:
  1. 1.
    You may temporarily be unable to withdraw: As with every protocol based on lending pools, the lender may not be able to withdraw all of his funds at a certain point in time if there isn’t enough liquidity in the pool. Iron Finance uses a dynamic interest rate model that reduces the likelihood of funds not being withdrawable for a prolonged period of time. To put it simply: When borrowers borrow a lot, the utilization rate goes up. The interest rate will then increase to incentivize lending, while simultaneously disincentivizing borrowers from borrowing more.
  2. 2.
    Each currency added to the Iron Finance protocol as collateral increases the protocol risk of insolvency. From a financial perspective, the assets of the Iron Finance protocol are the collaterals, while the liabilities are the loaned amounts. The underlying currencies of assets and liabilities often differ, with loans mostly taken in stablecoins and backed by volatile tokens. This means the protocol is heavily exposed to the failure of supported token systems as well as market fluctuations.
  3. 3.
    A centralized currency accepted as collateral exposes the protocol to its centralization risk. The risks that arise from a single point of failure in the underlying currencies flow into the Iron Finance Protocol.
  4. 4.
    Currencies only enabled for depositing and borrowing (not usable as collaterals) present lower risk for the protocol. Collaterals are the assets of the protocol. To remain solvent, these assets must remain greater than the liabilities, the loans. Currencies which can only be used for borrowing should always be excessively backed by other currencies as the collaterals.
  5. 5.
    Having volume from different currencies in our lending pools reduces risks via diversification benefits.
When adding a currency to the protocol, significant controls are required to ensure the currency will add more value than risk. Only currencies with a worthy product and significant community are considered. The currency risk assessment explores whether the currencies represent a reasonable amount of risk for the protocol, calibrating the currencies parameters to mitigate those risks.
Last modified 5mo ago
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