❗Lending Users’ Risks

Smart contract risk

Smart contract risk is a general risk when using DeFi protocols, including Compound, which is the base code of Moai Finance. Smart contracts are self-executing pieces of code that run on certain blockchains. Although they are designed to be secure, they can be vulnerable to bugs and exploits.

If there is a flaw in the smart contract code, it can be exploited by attackers to steal funds from the protocol. This can result in the loss of funds for suppliers and borrowers who are using the protocol. Smart contract risk is a major risk for all DeFi users, and it is important to carefully evaluate the security of the protocols before using them.

Liquidation

If the amount borrowed by an account exceeds its borrowing limit, a portion of the outstanding debt can be repaid by exchanging the user's collateral at the current market price, adjusted by a liquidation discount. This encourages arbitrageurs to intervene promptly, reducing the borrower's risk exposure and eliminating the protocol's risk. The percentage eligible for closure, known as the close factor, determines the portion of the borrowed asset that can be repaid and ranges from 0 to 1, for instance, 25%. Liquidation may be repeated until the borrower's debt falls below their borrowing capacity.

Market risk of the protocol

To borrow from the Moai Lending, a borrower must first supply collateral, with a value greater than the amount being borrowed (“excess collateralization”). If the value of that collateral declines below the amount borrowed (before liquidators can close the position), the borrower is not incentivized to repay their position.

100% Utilization Risk

When an asset is fully utilized, meaning that 100% of its supply has been lent out, no tokens are remaining in the pool. Consequently, attempts to withdraw or borrow will be unsuccessful. Users must wait until the utilization rate decreases, either by some users repaying their loans or by depositing new funds into the pool. This situation disproportionately affects users whose deposits constitute a significant portion of the pool or when the asset experiences exceptionally high demand for borrowing.