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Risks
Know your enemy, know your risks!
Liquidation:
- Risk:
- A $FLAT position runs the risk of liquidation when the position Debt Value reaches the Maximum Borrowable $FLAT (i.e. when Debt Ratio reaches 100% and the Safety Buffer reaches 0).
- Mitigation:
- Make sure to leave a buffer when minting $FLAT, ensuring that there's a buffer between the Debt Value and the Maximum Borrowable $FLAT
- Monitor your Safety Buffer frequently especially when the market is volatile, so you can add collateral or repay the outstanding loan in a timely manner before your position runs the risks of liquidation
Bad Debt
- Risk:
- If there is a sharp drop on the collateralized asset value and liquidators do not liquidate position in time, there is a possibility that there will be bad debt as FLAT will no longer be sufficiently backed by collateral
- Mitigation:
- We set a conservative Loan-to-Value (LTV) for each collateral pool based on its base assets' price volatility. Setting a conservative LTV will provide a buffer in case the collateralized asset price drops sharply, so even after the price drop, $FLAT would still be backed by collateralized asset greater than its value.
- We provide an incentive for liquidators to call for liquidation when a position is at risk to ensure timely liquidations of underwater positions, thereby preventing bad debt.
FLAT temporarily loses soft peg price of $1 USD:
- Risk:
- While $FLAT is a stablecoin, it could theoretically lose its price peg of $1 if it is oversold or overbought, as determined by the market supply & demand.
- Mitigation:
- We rely on a network of arbitrage bots to ensure that the price of FLAT remains close to $1. These bots generally monitor arbitrage opportunities and will capitalize these opportunities, correcting the price quite rapidly.
Last modified 5mo ago
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