As a zero-collateralized lending platform, the Atlendis platform implies a higher credit risk than its over-collateralized counterparts. Different components allow the mitigation of credit risk on the Atlendis platform.
- Whitelisting of Candidates. Only institutional borrowers will have the ability to be whitelisted on the Atlendis platform, and having their reputation at stake should lower the risk of default.
- Granular Control. On the Atlendis platform, lenders can individually choose their borrowers. They do not need to expose themselves to undesired risk from defaults, as a result of being outvoted during loan approval. They can also select their preferred lending rate, based on their own risk assessment and their investment profile. Therefore, lenders keep control over their investment portfolio and risk profile.
- Diversified Portfolio. By enabling liquidity providers to lend to a multitude of borrowers, the Atlendis platform allows the mitigation of credit risk, giving liquidity providers access to diversified exposure.
- Borrower's Loan Agreement. Further detailed in Legal Section.
As any DeFi protocol, the Atlendis platform faces liquidity risk. A reduced amount of liquidity on the Atlendis platform would affect both borrowers and lenders. A lack of liquidity on the Atlendis platform would restrict borrowers in their borrowing capacity, limiting the possibility for lenders to effectively lend their funds. The liquidity risk on the Atlendis protocol is tackled by two components:
- The upper and lower bounds of the lending rates are agreed with the borrower to make sure they are comfortable with the rates and will indeed borrow from their pool when in need of liquidity.
- Liquidity incentivization via distribution of liquidity rewards paid by the borrower to liquidity providers. The liquidity rewards earned by liquidity providers are high when liquidity is low, and low when liquidity is high. They are also dependant on the amount currently borrowed, incentivizing liquidity when the borrower might need it the most, i.e. when they are not already borrowing from their pool. Lenders know that either the borrower will borrow their funds, or they will earn liquidity rewards in addition to Aave's yield, so there is no missed opportunity cost for them. This should help align the incentives for both borrowers and lenders on the Atlendis platform.
As unused capital is placed on Aave, any event on Aave will affect the Atlendis platform directly. Aave enumerates the primary sources of market risk within its protocol.
- Shocks to market prices of collateral that cause the contracts to become insolvent due to under-collateralization.
- Loss of liquidity in an external marketplace, leading to a liquidator being disincentivized to liquidate defaulted collateral.
- Cascades of liquidations impacting external market prices which in turn lead to further liquidations (i.e. a deflationary spiral).
- Insolvency of the safety module due to extreme events where multiple collateral types concurrently fail to be liquidated.
Aave's sources of risk are direct sources of risk for the Atlendis protocol.