Risk Management Framework
A successful risk management program helps an organization consider the full range of risks it faces. The Hashstack team has done extensive research and tests to make Open a fail-safe protocol. Let’s look at some of the critical risk factors and how Open manages them.
Default risk is mitigated by implementing a cap of 70% on collateral value for withdrawals. Thus, if a user deposits $100 collateral and borrows $300, he can withdraw up to $70 from the sanctioned loan amount, and the remaining $230 can be used on the platform.
Most of the platforms rely on liquidators for their functioning. However, in some cases, liquidators may fail to liquidate a loan due to extreme market conditions. Things can get pretty ugly when the collateral offset (Liquidation discount) falls by 25%, and the liquidators are not taking the distressed loan. To prevent this, Hashshtack has implemented a dual liquidation mechanism. In such cases, Open will automatically liquidate the distressed loan.
Insufficient Liquidity Risk
To improve the protocol’s overall liquidity health, MCPs or Minimum Commitment Periods were introduced. MCPs are very important for the stability of the protocol as they prevent sudden liquidity shocks.
Interest Rate Model
Most of the lending platforms have fixed durations of the interest rate calculation. However, this may create an anomaly in the platform as users can enter or exit the protocol just before the new APR calculations. To prevent this, all the interest rates are calculated randomly within a duration of 4-7 days by using a VRF function. Furthermore, all the APRs are range bound to prevent sudden fluctuations in interest rates.
Most protocols rely on the oracle price for all their functions. However, during market crash events, oracle prices might not be able to reflect the true price of the asset. To prevent this, Open also estimates the average price at which the trade can be executed. This calculated value is termed the Fair Price. This feature allows the protocol to differentiate the true price from the general purpose price.