# Risk Statement

### **Risks to Lenders**

#### **Loss of Capital**

* **Risk:** If the liquidation bot fails to clear the liquidation in time during the period of high market volatility, the debt risk arising from the underwater position.
* **Mitigation:** We have adopted a cautious approach when setting key parameters to ensure a large buffer zone. Therefore, we believe that this risk risk scenario is extremely unlikely to occur.

#### **Timing of Asset Return**

* **Risk:** If the utilization rate of the pool is high, the time to recover the deposited assets will be delayed. Please note that farmers can borrow funds as long as they like, and there is no fixed term for when the funds must be returned.
* **Mitigation:** We use a triple-slope interest rate to optimize the capital utilization rate of 90%. When the utilization is beyond 90% (interest rates from 20% to 60%), sharply rising interest rates should incentivize more lenders to lend, and borrowers have to return outstanding loans, thereby optimizing the pool to stay at a flexible level below \~90%.

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### **Risks to Yield Farmers**

#### **Price impact when opening / closing a position**

**Risk:** If you try to open a large position relative to the pool size and require swapping, you transaction could incur a large price impact. As an example, if a liquidity of a pool is USD 100 million, swapping USD 1 million (1% of pool's liquidity) worth of token would incur **\~4% price impact.** If you are unfamiliar with how price impact works for AMM.

**Mitigation:** Open multiple smaller positions or open a smaller position and add collateral to that position at a later time. You should wait for a short interval for arbitrageur to bring price back to normal. Bring a combination of asset that require lower swapping requirement-e.g., if you want to open a 2x leverage on BUSD-BNB pair. Supplying only BNB token will result in a very small swap amount because the Vault will loan to you approximately equal value in BUSD. Avoid opening and exiting position in a short period of time. When exiting a large position, choose "Minimize Trading" strategy to reduce price impact from swapping asset and trading fees.

#### **Impermanent Loss (IL):**

* **Risk:** Risk of (impermanent) capital loss from asset rebalancing in the Automated Market Maker ("AMM") pool. Stable coins pairs farming are also subjected to impermanent loss. Just like any other coins, the price of stable tokens are dictated by supply and demand, which some time can cause the price to be off-pegged. While this value is generally small and transient, we have seen instances where stable coins stay off-pegged for an extend period of time. By opening a position with a large leverage, you are also amplifying the IL on your principal.
* **Mitigation:** Impermanent loss is not unique to H2O Finance. It is common among all yield farming and AMMs. While we currently do not yet have a way to mitigate IL, users can choose to yield farm asset pairs that have high correlations to minimize potential IL.&#x20;

#### **Negative APY:**

* **Risk:** This is a case when borrowing rate is higher than your yield farming gain. This means your debt position will grow faster than your equity value. If this continues for a period of time, it could reduce your equity value down to the level that triggers liquidation. Likely causes for this case to occur are:1, High borrowing pool utilization, pushing up the borrowing interest rate. 2, A significant price drop in the rewards token - i.e., CAKE causing the farming yield to drop.
* **Mitigation:** Monitor your positions closely and have a plan if APY turns negative - i.e., close position, wait and see, or add collateral to the position. If utilization remains high for a period longer than a few days, the team will analyze the situation and likely raise the borrowing interest rate which should lower utilization. Please be caution when opening a position if the pool's utilization is high.

#### **Liquidation**

* **Risk:** If you open a leveraged yield farming position, H2O Finance Bank will lend you a certain amount of funds. You will take the risk of being liquidated when the Debt Ratio (debt / position value) reaches the Liquidation Debt Ratio aka Kill Factor. See Pool-Specific Parameters for more information.
* **Mitigation:** This can be mitigated by using a lower leverage level, monitoring positions during volatile market conditions, and closing them before hitting the liquidation parameters.

### **Risks to Margin Traders**

#### &#x20;**Price impact when opening / closing a position**

**Risk:** Similar to leveraged yield farming, If you try to open a large position relative to the pool size and require swapping token, your transaction could incur a large price impact. If you are unfamiliar with how price impact works for AMM.

**Mitigation:** Open multiple smaller positions or open a smaller position and add collateral to that position at a later time. You should wait for a short interval for arbitrageur to bring price back to normal. In addition, the positions value is limited according to the depth of the liquidity pool to ensure that the impact of price on traders is within a reasonable range.

#### **Liquidation**

* **Risk:** If you open a margin trading position, H2O Finance Bank will lend you a certain amount of funds. You will take the risk of being liquidated when the Debt Ratio (debt / position value) reaches the Liquidation Debt Ratio aka Kill Factor. See Pool-Specific Parameters for more information.
* **Mitigation:** This can be mitigated by using a lower leverage level, monitoring positions during volatile market conditions, and closing them before hitting the liquidation parameters.

### **Smart Contract Risks**‌

* **Risk:** While smart contracts have been audited by third-party firms, they could theoretically have vulnerabilities.
* **Mitigation:** Having smart contracts audited by multiple professional third-party firms decreases the chance of vulnerabilities. We run a bug bounty program to provide incentives for people who find vulnerabilities in our live code to come to us as opposed to exploit them.

**While we do our best to eliminate all the possible risks, DeFi is an industry where events that no one predicted can occur(the dreaded black swans). So please don't invest your life savings, or risk assets you can't afford to lose. Be careful and enjoy！**
