Kadia Lending: risks

Draft

Kadia Lending is in development, not audited and not on mainnet. A test version of the ERG market runs on Ergo testnet (the testnet record). The contracts aren’t final. Every figure marked as a launch parameter comes from the economic model (EM §3), is illustrative until it’s re-frozen before deployment, and can change.

Source: kadia-lending docs/specs/economic-model.md (EM) and docs/specs/lending-design.md (LD) at commit 2bb9256 (2bb92562799019fab6ac95b2576ad94197b6b14f).

The specification lists its security properties as design intentions, not claims, until verification completes (LD §15).

Everyone

• Unaudited contracts. The contracts aren’t final and haven’t been audited. Bugs can lose funds.
• No pause. There are no admin keys, so nobody can freeze a market. That’s the trade-off for having no one who can take control.
• You trust Ergo consensus and your wallet. Read what your wallet shows before you sign.

Lenders

• Bad debt. If a loan’s collateral falls faster than it can be liquidated, the reserve absorbs the shortfall first, then every lender’s share value (EM §7, §9.4).
• No insurance or backstop. Losses beyond the reserve stay with lenders.
• Withdrawals wait for cash. When the pool is fully lent, you wait for repayments or new supply, or sell your shares on Kadia DEX (EM §8.2).
• USE below $1. Debt is counted at $1. A deep USE depeg is a loss to lenders, who hold USE (EM §2).
• Loss timing. Withdrawals pay book value until a loss is recognised. In a failure, lenders who withdraw early can leave before a loss lands on those who stay (EM §7, D17).

Borrowers

• Liquidation. If the ERG price falls far enough, anyone can liquidate part or all of your loan, and the liquidator takes a bonus from your collateral. See Loan-to-value and liquidation.
• A variable rate. The rate rises when the pool is busy, and it can rise quickly.
• A stale price. While the feed is old you can’t borrow more or remove collateral. You can always repay or add collateral.

LP market

• The LP market follows Kadia DEX. Its collateral value depends on the DEX pool’s reserves.
• Launch guards: new LP borrowing is limited while the market builds a track record (EM §10.4, D18, D44):
  • a debt ceiling;
  • a cap on how much of the DEX pool’s LP can be posted;
  • a minimum pool depth. These limit new loans only. Repaying, adding collateral and liquidation are always open.
• Slower liquidations. Liquidators receive LP tokens and may need time to turn them back into ERG and USE, which is why the LP market’s bonus is higher.

The oracle

• The ERG/USD feed is run by its own operators. Kadia binds it by its NFT. A feed failure or an extreme move between posts can leave loans under-collateralised (EM §4.4, §12.3).