What Are the Primary Risks Associated with Using Volatile Crypto Assets as Collateral?
The main risk is a 'cascade of liquidations' during a severe market downturn. A sharp drop in the collateral's price can trigger mass liquidations, which in turn puts further downward pressure on the asset's price, creating a death spiral.
Another risk is price oracle failure or manipulation, where incorrect price data could lead to wrongful liquidations. Smart contract bugs or exploits also pose a significant threat, potentially allowing attackers to steal collateral.
Lastly, network congestion can prevent borrowers from adding collateral in time to avoid liquidation.
Glossar
Volatile Crypto Assets
Volatility ⎊ Volatile crypto assets represent a class of digital assets characterized by significant price fluctuations over short periods, demanding sophisticated risk management strategies.
Network Congestion
Latency ⎊ Network congestion within cryptocurrency, options trading, and financial derivatives manifests as increased latency, directly impacting execution speeds and potentially leading to adverse selection against slower participants.
Decentralized Insurance
Resilience ⎊ Decentralized insurance, within the context of cryptocurrency derivatives and options trading, represents a paradigm shift from traditional indemnity-based models, particularly relevant given the inherent volatility and systemic risks within digital asset markets.
Price Oracle Failure
Failure ⎊ A price oracle failure represents a critical vulnerability within decentralized systems, particularly those reliant on off-chain data feeds for derivative pricing and settlement.