Risk Management

• For security purposes, Internal liquidity on ShadeSwap cannot be used as the sole price feed for assets supported on ShadeX.

• ShadeX currently uses Band for its base asset price feeds.

• If prices are stale from any oracle used to report price feeds for ShadeX, positions cannot be liquidated (LTV can’t be calculated).

• Oracles for LSTs (lent assets) report redemption rate, not market rate. In event of market rate deviation, debt is overvalued and positions that otherwise would be not liquidated are liquidated (either privately or publicly). During liquidation events, debt will be shown at higher value than it should be ( potentially leading to more collateral being required to be sold for debt token in private liquidations.

• Oracle for SILK (lent assets) reports redemption rate for SILK, not market rate. In event of market rate deviation, debt is overvalued and positions that otherwise might not be liquidated are liquidated (either privately or publicly). During liquidation events, debt will be shown at higher value than it should be ( potentially leading to more collateral being required to be sold for debt token in private liquidations. By using SILK redemption rate for SILK being lent, this incentivizes borrowers to buy cheap SILK to repay debt valued at peg rate (bringing further stability to SILK market rate relative to peg rate).

• If bad debt were to accrue for a particular debt token (where collateral value falling below debt), the bad debt is redistributed across lenders in the vault.

  • This would primarily occur if both private and public liquidations were not able to reduce the LTV of a borrowing position quick enough to prevent there being debt tokens needing to still be liquidated while having zero value of collateral left backing the position.

  • The bad debt is resolved by selling not only the collateral backing the original debt position, but also utilizing a portion of lent assets to compensate for the bad debt shortfall.

• Lenders must accept the risk associated with all collateral in a vault.

• The main risks associated with collateral are demand, volatility, and oracle related.

  • Oracle:

    • Given the importance of oracles providing the “source of truth” for prices of assets that determine LTV, if an oracle were to fail and not return a price, or return a stale price, the ability to calculate a positions LTV becomes impossible, and as a result the position cannot be liquidated until the price feed is restored.

    • Additionally, if a collateral is exposed to systemic risk (like contract or module exploit), all debt positions involving this collateral will see an increase in their LTV, which could lead to liquidations. Given the cross-margin nature of ShadeX borrowing, the failure of a single collateral can potentially lead to liquidations of other collateral assets to repay debt (depending on LTV post exposure to systemic risk). The inability to repay debt quick enough could lead to accumulation of bad debt, in which case lenders will take the hit as bad debt is repaid by utilizing lent assets (pro rata).

    • Unless market rates for LSDs or bidirectional redemption rates (redemption rates that can decrease in event of principal + accumulated rewards being exploited) are provided by oracle, ShadeX should not use LSDs as collateral.

    • Unless market rates for bridged assets are provided by oracle, ShadeX should sparingly use bridged assets as collateral. If used, conservative collateral caps should be placed on this collateral type.

  • Demand:

    • During public liquidations, users must submit debt tokens to receive collateral being liquidated. Public liquidations are a first come, first serve marketplace where users can repay any debts available and receive any collateral that is backing that loan. It is assumed that the collateral with the greatest perceived value will be claimed first, with the collateral perceived to have the least value will be claimed last. As a result of the need to clear liquidatable positions to prevent accumulation of bad debt, only collateral tokens with clear demand can be whitelisted.