User Docs

Asset Risk

Currencies and assets are both the axel and the sources of liability for all DeFi ecosystems, which is why it's important to study the risks imposed on protocols by the market, counterparties and smart contracts. There are more risks to be considered when it comes to lending protocols, such as Liquidation Risks. This section is dedicated to the study of such risks on Australis.

Assets on Australis

The main objective when it comes to assets, is to make sure their added value is more than their risks. As mentioned before Australis is a lending/borrowing protocol first and foremost. When users make a deposit, they receive “astTokens” which represent their deposited funds and interest. While lending, users must use a form of valid crypto currency as collateral to insure the security of the depositors’ fund. For this purpose, Australis has made available only some tokens to be used as collateral. Here are several concerns that led to such a conclusion:
Lending stablecoins is often more popular whilst their collaterals are volatile tokens. This leaves the service vulnerable to failure of supported token systems and market fluctuations. Australis is a decentralized protocol and centralized currencies such as USDT will compromise this core concept. Though to protect the solvency of the service such currencies are essential for depositing and borrowing, assets such as this are not to be used as collateral. In addition, currencies added to the protocol must be implemented in the smart contract. This increases the complexity of transactions and as a result, the gas costs will increase. For further elaboration on the importance of currencies specifically those accepted as collateral, pay attention to these components in asset risk measurement:

Risk Scale

The risk scale ranges from lowest risk (A+) for the safest assets to the highest risk (D-). A high-risk asset such as USDT is included in the integration but is not eligible as collateral.

Risk Factors

Smart Contract Risk

Smart contracts are codes developed by blockchain developers. Protocols such as Australis interact with a number of these contracts. Even Though they are open source and open to study by anyone, they impose known and yet to be found risks to such protocols.

Counterparty Risk

Counterparty risk involves factors such as how, by whom and in what quantity are the integrated tokens governed. Even Though most of said assets are governed in a decentralized fashion, they can still expose the protocol to direct control of funds by one or more parties. Currencies with a high counterparty risk (D+ and below) disqualify as collateral.

Market Risk

Supply and demand affect the market fluctuation a great deal depending on the market size. This directly affects the collateralized asset values within the protocol and could impose liquidation risk to collaterals whose value have decreased as a result.
  • Liquidity The liquidity is based on the volume on the markets, which is key for the liquidation process. This can be mitigated through the liquidation parameters: the lower the liquidity, the higher the incentives.
  • Volatility The volatility of price can negatively affect the collateral which safeguards the solvency of the protocol and must cover the liabilities. The risk of the collateral falling below the borrowed amounts can be mitigated through the level of coverage required, the LTV. It also affects the liquidation process as the margin for liquidators needs to allow for profit.
  • Market Capitalization The market capitalization represents the size of the market, which is important when it comes to liquidating collateral. The smaller the market cap, the higher the incentives.
  • Overall Risk The overall risk rating is used to calibrate the Reserve Factor with factors ranging from 10% for the less risky assets to 20% for the riskiest.