To determine adequate liquidation thresholds, lending rates, and borrowing rates for each currency, IronLend will take into account 1. Smart Contract risks, 2. Counter-party risk, and 3. Market risks.
Smart Contract Risks
Smart contract risk depends on the security and robustness of the underlying code of the currency. If the currency suffers a breakdown due to smart contract vulnerability, the protocol’s solvency can be threatened, due loss of value of the underlying asset.
To be considered as collateral in IronLend, projects are gauged on several factors:
Projects must be audited to be considered. The existence of a bug bounty program can further weight positively toward the project.
How long the project has existed and how many transactions have occurred represent its use, community, and development. The more mature a project is, the lower risk it generally is considered.
Counterparty risk assesses the quality of a potential collateral’s governance. How and by who the currency is governed can help identify its degree of decentralisation, and to what extent the project is susceptible to various attack vectors on control of funds. Counterparty risk is measured by the degree of the project’s centralisation, number of holders, and trust in the project’s governance.
Currencies with a high counterparty risk will not be considered as collateral.
Market risks are linked to the market size and fluctuations in offer and demand. These risks are particularly relevant for the assets of the protocol: the collateral. If the value of the collateral decreases, it might reach the liquidation threshold and start getting liquidated. The markets then need to hold sufficient volume for these liquidations - sells which tend to lower the price of the underlying asset through slippage affecting the value recovered.