To Encapsulate the Potential Risks and Their Countermeasures When using Rabbit Finance
Rabbit Finance is an excess lending protocol based on the Binance Smart Chain, which is also an excellent leveraged yield farming on the Binance Smart Chain. Rabbit Finance provides a detailed description when it comes to the risks that users may face during use, make sure you read it through before using it.
Risk: If the liquidation bot fails to clear the liquidation in time during the period of severe market volatility, the debt risk arising from the underwater position.
Mitigation: Rabbit Finance has adopted a cautious approach when setting key parameters to ensure a large buffer zone. Therefore, Rabbit Finance believes that this risk situation is extremely unlikely to occur.
Asset Return Time
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 they wish, and there is no fixed deadline for when the funds must be returned.
Mitigation: Rabbit Finance uses three levels of interest rates to optimize the capital utilization rate of 90%. When the utilization is higher than 90% (interest rates from 10% to 60%), sharply rising interest rates should incentivize more lenders to lend, and borrowers have to repay outstanding loans, thereby keeping the pool below 90% the level of flexibility.
Risks to Yield Farmers
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 token would incur ~4% price impact. If you are unfamiliar with how price the 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 a 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 positions in a short period of time. When exiting a large position, choose the “Minimize Trading” strategy to reduce price impact from swapping assets 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 is also subjected to impermanent loss. Just like any other coin, the price of stable tokens is dictated by supply and demand, which sometimes can cause the price to be off-pegged. While this value is generally small and transient, Rabbit Finance has seen instances where stable coins stay off-pegged for an extended period of time. By opening a position with large leverage, you are also amplifying the IL on your principal.
Mitigation: Impermanent loss is not unique to Rabbit Finance. It is common among all yield farming and AMMs. While Rabbit Finance currently does 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.
Risk: This is a case when the 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. Exercise cautions when opening a position if the pool’s utilization is high.
Risk: If you open a leveraged yield farming position, Rabbit 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 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. Rabbit Finance runs a bug bounty program to provide incentives for people who find vulnerabilities in our live code to come to us as opposed to exploiting them.
While the Rabbit Finance team does their 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！
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