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When using Loopscale, it’s important to understand and manage the financial and operational risks involved. This page outlines key risks to consider and provides guidance on mitigating them. Some of these risks apply only to borrowers or only to lenders.

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Financial Risks

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Interest Rate Risk

Interest rate risk arises from the potential for market rates to diverge from the fixed rate of your loan over time. Borrowing or lending at a fixed rate for a specific duration may result in your loan being more expensive or cheaper than the prevailing market rate. The sensitivity to interest rate changes increases with loan duration.

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Liquidity Risk

The diverse range of collateral accepted by Loopscale can expose users to liquidity risk. Different tokens have varying levels of underlying liquidity and availability across trading venues. This risk of illiquidity of collateral should be considered when lending.

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Liquidation Risk

Loans on Loopscale are subject to both price and payment-based liquidations. If the collateral value relative to the principal plus accrued interest falls below the liquidation threshold, the collateral may be seized. In such cases, repayments made will be forfeited, and the collateral will be transferred to the liquidator. Borrowers should closely monitor their loan’s health ratio, as a ratio of 0% indicates eligibility for liquidation. To avoid liquidation, borrowers can repay a portion of the loan or add more collateral.

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Refinancing Risk

Refinancing on Loopscale is the process of paying off an existing loan with an order from the books. There are several reasons a refinance may fail including lack of liquidity on the orderbooks, chain congestion, or technical failure. If the refinance fails and the loan is past the grace period, the loan will be liquidated. Another risk to refinancing is ending up with higher rate loans. The matching engine attempts to find the lowest cost loan however that may be significantly higher than the rate at which you started the loan at.

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Time Risk

Loans that are not set up to refinance automatically or if there are issues refinancing may be subject to liquidation early. This will result in the loss of collateral and is unrecoverable.

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Asset Counterparty Risks

Assets you are borrowing or using as collateral have underlying risks such as depegs, team risks, market risks, and concentration risks. Pick the assets you transact in wisely and understand that Loopscale does not control many of the factors that impact most of these assets. If a specific asset issuer blacklists you or the Loopscale Protocol there may be disruption of service. Assets used for borrowing or collateral are subject to various risks, including depegs, team risks, market risks, and concentration risks. For example, Stablecoins used in Loopscale, such as USDC, may experience price deviations from their intended peg (usually 1 USD). As tokens are priced in USD, a depeg can lead to a devaluation of cash or present value of assets. This, in turn, may reduce a borrower’s health factor and increase liquidation risk. It’s essential to carefully select assets and understand that Loopscale does not control many of the factors impacting these assets. If an asset issuer blacklists a user or the Loopscale Protocol, service disruptions may occur.

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Operational Risks

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Smart Contract Risk

Contracts inherently risk containing vulnerabilities that can be exploited by attackers, including compromised or manipulated external dependencies and economic incentives. All Loopscale Protocol contracts have been audited and are undergoing additional audits. Upon completion of these audits and the open-sourcing of the protocol, a bug bounty program will be established.

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Oracle Price Risk

Any Loopscale loan may be connected to an oracle, as established by the borrower or lender in the initial order. For all loans on Loopscale, the connected oracles have been determined by the Loopscale team. All oracles are subject to price manipulation or incorrect inputs, falsely reducing or increasing asset values, leading to premature liquidations or bad debt. Oracle quality, including safety, liveness, centralized control, and precision and frequency of price updates, should be considered in assessing risk.