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Introduction

The Shroomy Protocol is designed with risk management as a core principle. This documentation outlines the key risks associated with the protocol and the mechanisms implemented to mitigate them. Understanding these risks is essential for all participants in the Shroomy Project ecosystem.

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Risk Types

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Smart Contract Risk

Smart contract risk refers to the potential for vulnerabilities in the protocol’s code that could lead to unexpected behavior or loss of funds. To mitigate this risk, ShroomyProject implements:
  • Multiple independent security audits before deployment
  • Formal verification of critical components
  • Bug bounty programs to incentivize responsible disclosure
  • Progressive decentralization of governance

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Market Risk

Market risk relates to the volatility of crypto assets and how this affects the protocol’s stability.

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Collateral Value Fluctuations

The value of assets used as collateral can experience significant price volatility. ShroomyProject mitigates this through:
  • Diversified collateral types
  • Conservative loan-to-value (LTV) ratios
  • Real-time price feeds via oracle networks
  • Risk parameters that are asset-specific

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Liquidations

When a borrower’s health factor falls below 1, their position becomes eligible for liquidation. This process ensures the protocol remains solvent even during extreme market conditions:
  • Liquidators repay a portion of the outstanding debt
  • In return, they receive discounted collateral (liquidation bonus)
  • Gas costs must be considered when evaluating liquidation profitability

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Liquidity Risk

Liquidity risk concerns the availability of assets in the protocol for withdrawals and liquidations.

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Utilization Rate

The utilization rate represents the percentage of supplied assets that are currently being borrowed. ShroomyProject implements:
  • Interest rate models that incentivize optimal utilization
  • Borrow caps to limit exposure to individual assets
  • Supply caps to manage protocol growth

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Reserve Factor

A portion of the interest paid by borrowers is set aside as a reserve for the protocol. This creates a safety buffer against potential shortfalls and supports long-term sustainability.

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Oracle Risk

Shroomy Project relies on price oracles to determine the value of assets within the protocol. Risks include:
  • Data manipulation attacks
  • Temporary market dislocations
  • Technical failures
Mitigations include:
  • Multiple independent oracle providers
  • Time-weighted average prices
  • Circuit breakers for extreme price movements
  • Fallback mechanisms

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Risk Parameters

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Health Factor

The health factor is a critical metric that represents the safety of a user’s position relative to the liquidation threshold: 
Health Factor = Total Collateral Value in ETH * Liquidation Threshold / Total Borrows in ETH
  • A health factor above 1 means the position is safe
  • A health factor below 1 makes the position eligible for liquidation
  • Users should maintain a buffer above 1 to account for market volatility

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Loan-to-Value (LTV)

The maximum loan-to-value ratio determines how much a user can borrow relative to their collateral: 
Maximum Borrow Amount = Collateral Value * Maximum LTV
Each asset has its own maximum LTV, reflecting its risk profile.

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Liquidation Threshold

The liquidation threshold is the percentage at which a position becomes undercollateralized: 
Liquidation Threshold = Total Borrows in ETH / Total Collateral Value in ETH
This is typically set higher than the maximum LTV to provide a safety buffer.

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Liquidation Bonus

The liquidation bonus is the discount liquidators receive when purchasing collateral during a liquidation event. This incentivizes rapid restoration of protocol health.

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Risk Management Best Practices

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For Suppliers

  • Diversify across assets to reduce exposure to individual asset volatility
  • Be aware of the risks associated with each asset pool
  • Monitor governance proposals that may affect risk parameters

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For Borrowers

  • Maintain a healthy buffer above the minimum health factor
  • Set up monitoring and alerts for your positions
  • Consider hedging strategies for volatile assets
  • Be prepared for potential liquidations during market downturns

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For Liquidators

  • Calculate profitability carefully, accounting for gas costs
  • Develop efficient liquidation strategies
  • Monitor for liquidation opportunities across multiple assets

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Conclusion

Risk management is a shared responsibility among all participants in the Shroomy Project ecosystem. By understanding these risks and following best practices, users can make informed decisions while contributing to the overall stability and success of the protocol.