Risk Management
Risk Framework
LiquitX implements defense-in-depth across multiple dimensions:
Fund-Level Risk (Tranche Protection)
- Junior tranche provides first-loss protection
- Senior/Junior ratio configurable per fund (10-95%)
- Junior locked until senior fully paid
- Management fees align manager incentives
Asset-Level Risk
- Due diligence requirements for managers
- M-of-N oracle ratings
- Exposure caps per asset within funds
Pool-Level Risk
- Risk bucket segregation
- Weight limits (1-99% per asset)
- Minimum liquidity requirements
Protocol-Level Risk
- Insurance fund reserves (covers losses after junior depleted)
- Circuit breakers
- Governance timelock delays
Exposure Management
Exposure Caps
- Per-asset: Per-asset: 5% of pool
- Per-manager: Per-manager: 20% of bucket
- Per-vertical: Per-vertical: 40% of total TVL
- Per-jurisdiction: Per-jurisdiction: 60% of total TVL
Loss Handling Mechanism
Fund-Level Loss Cascade
When an asset within a fund defaults:
- Loss quantification: Loss = Principal - Recovery Value
- Junior absorption: Junior tranche absorbs up to its full value
- Insurance claim: If junior depleted, claim from Insurance Fund
- Senior haircut: Last resort if insurance insufficient
Lending Pool Liquidations
For LP token collateral in the Lending Pool:
- TWAP-based valuation TWAP-based valuation (manipulation resistant)
- Health factor calculation: Health factor calculation: healthFactor = (collateralValue × LTV) / totalDebt
- Liquidation trigger: Liquidation trigger: healthFactor < 1.0
- Liquidator incentive: Liquidator incentive: liquidation bonus (5-15% by risk bucket)
- Dutch auction fallback Dutch auction fallback for illiquid positions
Oracle Security
TWAP pricing for protocol-critical operations:
| Operation | TWAP Window |
|---|---|
| Trading | Spot price |
| Collateral valuation | 30 minutes |
| Liquidation trigger | 1 hour |
| Insurance claims | 24 hours |
Circuit Breaker
Automated safety mechanisms protect the protocol:
Trigger Conditions
| Condition | Action |
|---|---|
| Price deviation > 20% in 1 hour | Pause new deposits |
| Utilization > 95% for 30 min | Pause borrows |
| Default rate > 5% in 24 hours | Emergency halt |
| Insurance fund < 20% target | Elevated monitoring |
| Oracle staleness > 1 hour | Pause affected pools |
Severity Levels
| Level | Status | Actions |
|---|---|---|
| 0 | NORMAL | All operations active |
| 1 | WARNING | Elevated monitoring, no restrictions |
| 2 | PARTIAL_HALT | Pause new deposits/borrows |
| 3 | EMERGENCY_HALT | Only withdrawals/repayments allowed |
Insurance Fund
Funding Sources
- Yield waterfall contributions (5% of cashflows)
- Liquidation penalties
- Protocol-owned liquidity
- Direct deposits
Coverage Limits
- Per-asset cap: 10% of fund
- Per-bucket cap: 40% of fund
- Claim cooldown: 24 hours
- Target fund size: $1,000,000 per jurisdiction