Risks

With Edge Protocol's Beta Launch, there are three significant risks that Edge Protocol has a responsibility to acknowledge to every participant.

Protocol

Oracle and price discovery risks.

Although we did our best to use the oracles that are real-time, harder to be manipulated, and too costly for manipulation compared to the amount of money in our Genesis pool, in the worst case where oracles get manipulated, the assets in the pool are at risk of getting drained.

To address those rare cases, we continuously monitor the activity to flag out the suspicious activity so we can pause the pool to save the fund before it gets drained.

Smart contract risk

The Z Institute has officially audited Edge Protocol, but there's always the possibility of a bug or vulnerability that compromises participants' funds.

Lenders

Illiquidity Risk

Our interest rate model for each asset has a different optimal utilization rate to ensure that each asset has enough liquidity based on its volatility. However, there is always a possibility where FUD happens, and all lenders come to withdraw their deposit from the pool simultaneously. If that happens, we have to pause the operation since we cannot give all the capital out simultaneously.

Research and information about illiquidity risks can be found here

Underwater Risk

We have set the appropriate collateral factor, borrowing factor, and liquidation incentive for each asset to make sure that repaying loans or even liquidations can be made in time. However, there's always a possibility that the price changes much more than in history, leaving nobody able to liquidate the whole position in time, resulting in an underwater position where not all borrowed assets are repaid. So, apart from Edge using Insurance fund to subsidize the loss, the lenders may share the risk of those underwater debts.

Borrowers

Liquidation Risk

We have set the appropriate collateral factor, borrowing factor, and liquidation incentive for each asset to make sure that repaying loans or even liquidations can be made in time. However, there is the possibility that the borrower doesn't repay or doesn't supply more assets in time before reaching liquidation. The liquidation risk means that borrowers will lose some of their collateral and liquidity incentives to the liquidators.

So we recommend borrowers to be careful managing their borrowing positions' healthiness. Edge also provides UI to suggest the risk ratio level that the user should watch out for.

More information on debt management can be found here.