🟥Risks

Although Camel takes a multitude of safety precautions, farming and participating in DeFi comes with certain risks. Here, we discuss the potential risks associated with using Camel Finance.

Risks to Lenders

Loss of Capital:

• 🔴 Risk:

  • the risk of debt accrued by underwater positions in case liquidators does not liquidate in time during a period of high market volatility.

• 🔵 Mitigation:

  • we have taken a cautious approach in setting key parameters to ensure a large buffer. We also have provided enough incentive to liquidators to call and liquidate applicable positions. Hence, we believe this risk scenario is very unlikely to occur.

Timing of Asset Return:

• 🔴 Risk:

  • delay in getting deposited assets back in case of the pool’s high level of utilization. Please note that farmers can borrow the 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 for 90% fund utilization. The steep increase in interest rate beyond the 90% utilization (lending fees scaling from 20 - 150%) should incentivize more lenders to deposit funds and borrowers to return outstanding loans, optimizing the pool to stay at a flexible level below 90%.

Risks to Yield Farmers

Farming has always been a risky business, no matter whether you plow hard soil to harvest wheat or seek to grow yields on virtual DeFi fields.

Price impact when entering/exiting a position:

• 🔴 Risk:

  • If you try to open a large position relative to the pool size and require swapping, your transaction could incur a large price impact.

  • As an example, if the liquidity of a pool is USD 100 million, swapping USD 1 million (1% of pool’s liquidity) worth of tokens would incur ~4% price impact.

  • If you are unfamiliar with how the price impact works for AMM, please read here on how xy = k AMMs work.
• 🔵 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 an arbitrageur to bring the price back to normal.

  • Bring a combination of assets that require lower swapping requirements.

  • Avoid opening and exiting the position in a short period of time.

  • When exiting a large position, choose the "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.

  • Even stable coin pairs can be subject to impermanent loss if the price of at least one moves off peg. While in general, the IL from this is small and transient, historically, there have been instances where stable coins have stayed off-peg for extended periods of time. By opening a position with large leverage, you are also amplifying the potential IL on your principal.

• 🔵 Mitigation:

  • Impermanent loss is not unique to Camel 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. For more information on IL, you can start with this article.

Negative APY

• 🔴 Risk:

  • This is a scenario where the borrowing interest 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 scenario to occur are 1.) high borrowing pool utilization, pushing up the borrowing interest rate. 2.) A significant price drop in the rewards token.

• 🔵 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.

  • Exercise cautions when opening a position if the pool's utilization is high.

Liquidation:

• 🔴 Risk:

  • If you open a leveraged yield farming position, Camel Finance borrows a base asset for you to farm. You run the risk of being liquidated if the price of the borrowed asset appreciates against the farming token pair. Your position will be liquidated when the Debt Ratio (debt/position value) reaches the Liquidation Debt Ratio aka Kill Threshold.

• 🔵 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 our smart contracts have been audited by third-party firms, they could theoretically have vulnerabilities.

• 🔵 Mitigation:

  • Having smart contracts audited by multiple professional and reputable third-party firms decreases the chance of vulnerabilities.

  • We also run a bug bounty program to provide incentives for people to look for vulnerabilities in our live code as an extra layer to filter out any potential issues.

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. Try to be as careful with your funds as we are with our code.