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Risks and Fees

How Lend accrues value to SHD holders, and risks all users should be aware of before using Lend and Silk

Fees

Lend charges the following fees:
  • Interest: This is an APR that accrues based on the size of your debt. Every time someone interacts with a Vault, interest is compounded for all borrowers at the same time. Interest is simply added to your outstanding debt as it accrues. You do not have to make regular payments on your loans. The protocol has permission to change interest rates. Interest rates can be changed once every 7 days, and can be changed by a maximum of 1% in either direction. Interest rates cannot be negative.
  • Borrow Fee: This is a one-time fee that you are charged when you open a position. The fee is simply added to your outstanding debt. There is a base Borrow Fee which can be configured per vault by the protocol. Borrow Fees can be changed once every 7 days, and can be changed by a maximum of 1% in either direction. Borrow Fees cannot be negative.
  • Liquidation Fee: This is equivalent to the Liquidation Discount. When a Liquidation event occurs, this fee is taken from the liquidated borrower's collateral and distributed between the Stability Pool, the protocol, and the caller of the Liquidate function. Redistributions do not charge a fee.
  • Redemption Fee: This is a fee that is charged when someone tries to redeem Silk for collateral from a Vault. There is a minimum fee of 1% to discourage Redemptions except when the price of Silk is below peg. Redemption Fees are split equally between the borrowers who fund the Redemption and the protocol. The minimum Redemption Fee cannot be changed.

Variable Borrow and Redemption Fees

Borrow and Redemption Fees also have a variable component. These variable components are meant to balance the supply of Silk with market demand.
There is a running sum of the total amount of Silk that has been redeemed over the life of the system. This value decays over time with an exponential decay function: e^(-f*n), where f is the Decay Factor and n is the number of days since the last Redemption (in seconds -- e.g. if the last Redemption was 43,200 seconds ago, n=0.5). The Decay Factor is set to 0.15, but may be changed by the protocol to change the rate of decay. The decayed value is known as the Adjusted Sum
The Adjusted Sum is then used to calculate the Utilization Ratio with the following function: U=S/T, where U is the Utilization Ratio, S is the Adjusted Sum, and T is the total amount of Silk minted through Lend across all Vaults.
The Utilization Ratio is then used to calculate the Redemption Fee with the following function: 1 / (ln(U)/A) * -1, where U is the Utilization Ratio and A is the Fee Aggression. The Fee Aggression is set to 0.06, but may be changed by the protocol to change how aggressively the Redemption Fee will change in response to the Utilization Ratio.
The Utilization Ratio can never be zero because it is only ever calculated upon Redemption, so the Adjusted Sum will always be greater than zero. Utilization Ratios greater than approximately 0.9417 result in Redemption Fees greater than 100%. Since the Utilization Ratio can never be zero, we can avoid the undefined behavior of the ln function at zero. As a safeguard, Redemptions that result in Utilization Ratios of greater than 0.9417 will fail since the Redemption Fee would be nearly or exceeding 100% -- it is expected that the prohibitively high Redemption Fees will prevent a Utilization Ratio that gets anywhere near this limit.
The variable Borrow Fee is calculated as the Redemption Fee minus 1%, divided by 2. This ensures that the minimum Borrow Fee is equal to the configured Base Fee on the Vault, but the Borrow Fee will increase as Redemption Fees increase.
A higher volume of Redemptions implies that the supply of Silk increasingly exceeds market demand. As the Redemption Fee increases, it will take time to decay back to the 1% minimum fee, which minimizes the shock associated with large and sudden changes in market demand. The variable borrowing fee will strongly discourage further supply growth while giving the Redemption Fee time to decay, and time for excess supply to be gradually absorbed.

Fee Collection

Fees on Lend are collected by executing a fee collection message on a Vault. Fees are collected by calculating total outstanding receivables and minting Silk to the protocol treasury in the amount of uncollected fees. This minted Silk is eventually "made whole" as receivables are collected when a position is closed through liquidation, redistribution, redemption, or repayment.
This fee collection mechanism allows the protocol to realize fee income immediately without introducing any additional risk to the system. The Silk minted as income for the protocol is collateralized by the borrowers who owe the fees, and therefore do not result in uncollateralized inflation of Silk.

Risks

Lend is a decentralized lending protocol with the primary function of providing the entry and exit point for all Silk in circulation. This means all parts of the system are built to prioritize system solvency and Silk stability. As a result, users of Lend are exposed to a number of risks that are unique to Lend.
In addition to these unique risks, using Lend also carries all standard risks associated with borrowing.
  • The peg of Silk will move as the prices of the currencies that define the peg move. This means the value of your debt may increase if Silk appreciates.
  • All collateral used to enter a Lend position has unique risks and volatility profiles. Even stablecoin collateral can experience severe depegging events, exposing borrowers to liquidation risk. Ensure you understand all the risks associated with your chosen collateral before opening a position on Lend.
  • Lend is a Smart Contract platform built on an experimental blockchain network. Lend has been extensively audited and based on existing proven collateralized lending systems, but it is a complex system that may carry unidentified risks. The network that Lend operates on may itself experience catastrophic downtime and loss of funds in the event of an exploit or bug.
  • Many parameters in Lend can be controlled by governance. An exploit in protocol governance could expose users to malicious configuration changes such as interest rate increases, however there are extensive safeguards in place to mitigate this risk.
  • The configurable parameters in Lend mean that your interest rate may change unexpectedly. There are safeguards in place to contain the possible magnitude of these moves, however if you do not keep up to date with system parameter updates your position may become very different from when you originally opened it.
  • All borrowers in Lend are exposed to system insolvency risk -- in the event that Lend is unable to honor outstanding liabilities through the existing stability mechanisms, excess liabilities will be distributed pro rata to all borrowers.
  • All borrowers in Lend are eligible for Redemption -- while there are systems in place to discourage excessive redemption and ensure redemptions are always profitable for borrowers who fund the Redemptions, your collateral may be sold without notice to honor Redemptions.
  • Lend uses third party oracles to determine prices. These oracles are themselves Smart Contracts which carry their own Smart Contract risk. An exploit or bug in a price feed can result in system insolvency. There are safeguards in place to mitigate this risk in the form of requiring a certain price update frequency, but it is impossible to eliminate oracle risk.