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Risks Involved

Market volatility risk

Cryptocurrencies, both specifically and in general, are highly volatile and so generate significant asset risks for holders. Due to the unpredictable nature of cryptocurrencies and the sector overall, prices can fluctuate rapidly, potentially resulting in substantial losses. It is important to be aware of this risk and take mitigation steps to manage it to a degree you are willing to accept. When you have a borrow position in a lending protocol, market volatility can cause the collateral ratio required for your portfolio to remain solvent to drop extremely rapidly, putting your collateral at real risk of being liquidated. This is a risk circumstance that is very common in lending protocols and one you must be aware of. It is crucial to monitor your portfolio and risk levels constantly and adjust them to your requirements based on the circumstances of both the market and any specific token asset.

Risk of a liquidation event

Risk from liquidation events is a significant issue in the lending protocol sector, regularly occurring for a proportion of the protocol’s borrowers. It is possible for your position to be liquidated and your assets sold to repay any outstanding borrow position if the value of your collateral in your portfolio or within a specific token market falls below a determined threshold. Such events are much more likely to occur with volatile token assets and/or during times when crypto markets overall are volatile. Cryptocurrencies are renowned for being highly volatile. To reduce the likelihood of a potential liquidation event, it is crucial to constantly check the status of your portfolio on Minterest, and its various token supply and borrow positions, to maintain the required collateralisation ratios which avoid such an event. Additionally, lending protocols may deploy varying methodologies in managing solvency positions and undertaking liquidation events and these methodologies may be subject to error, including but not limited to, failures in their intended functioning or limitations in their design and construction. In managing liquidation risk, it is essential prior to any borrow functions being undertaken on a lending protocol to research and properly understand whether it is possible the protocol may be subject to such risks.

Smart contract risk

Though Minterest has completed 5 major security audits with the best firms in the Web3 industry, smart contract risk is a significant and widespread issue for decentralised finance (DeFi) protocols. Supplying and borrowing transactions are carried out by such protocols using smart contracts, however, these contracts are prone to bugs, hacks, and other weaknesses. Assets can be lost due to any smart contract error or vulnerability and given the absence of a central authority that can intervene and reclaim any lost assets, any such retrieval is highly challenging. Before engaging in any lending protocol operations, it is essential to perform due diligence and investigate its credibility and security to assess the risk of doing so.

Liquidity risk

Liquidity risk is a key factor to account for in using DeFi lending protocols. This is a risk that arises when the protocol does not have enough liquidity in its various token markets to enable users seeking to borrow, lend, or withdraw at a particular time to be able to do so. Lack of liquidity can result in increased transaction costs, longer wait times, and so result in greater slippage. It is prudent to manage this risk by evaluating both the protocol's overall liquidity and its various token markets to determine whether the degree of risk is acceptable to you before supplying token assets.

Centralisation risk

DeFi lending protocols, while decentralised in nature, do possess varying degrees of centralisation risk. This risk is associated with the concentration of decision-making over various functions of the protocol being in the hands of a limited group of individuals or entities, leading to a potential lack of transparency, control, and security for other users. To mitigate this risk, it is recommended to research the protocol's governance structure to assess the level of decentralisation, and determine whether it satisfies your individual requirements.

Regulatory risk

As DeFi currently operates outside of many of the regulatory frameworks of traditional financial systems, it may become subject to new regulations or a new regulatory environment in the future which could lead to restrictions on access to certain markets, assets, or features of the protocol. Users should be aware of potential regulatory risks and keep themselves updated on relevant regulations and compliance measures in both considering and managing the potential impact of regulatory changes on the protocol and their tokenised assets.