Risks

Overview

This page outlines the key risks for participants in Backpack's borrow/lend system. For detailed mechanics of how liquidations and ADL work, see Liquidation.

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Lender Risks

Asset Substitution Risk (ADL)

In rare, extreme scenarios, you may receive USD value instead of your original token.

Normal case: Borrower is liquidated → your original token is returned to the pool.

ADL case: Standard liquidation fails → you receive USD equivalent.

This only happens when:

• Prices move faster than liquidation can execute

• Insufficient liquidity to repurchase the borrowed asset

• Backstop Liquidity Providers cannot absorb the position

Example:

You lend 1 BTC. Borrower defaults during extreme volatility.

Normal: You get 1 BTC back.
ADL: You get $100,000 USDC (BTC value at time of ADL).

You receive full value—just potentially in a different asset.

Price Display Note: ADL transactions are executed off-book (outside the public orderbook). As a result, these execution prices are not reflected in K-line charts.

Redemption Risk (High Utilization)

When pool utilization is high, you may not be able to redeem immediately.

Utilization	Redemption
< throttled utilization	Instant
> throttled utilization	May be delayed
100%	Blocked until borrowers repay or are liquidated

Mitigation: Monitor utilization and redeem before anticipated high-demand periods. High utilization also means high interest rates, which incentivizes repayment.

Interest Rate Volatility

Interest rates adjust dynamically based on utilization. During high-demand periods, rates can spike significantly. While this benefits lenders, rapid rate changes can affect expected returns.

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Borrower Risks

Liquidation Risk

If your collateral value falls relative to your borrow, you face liquidation. See Liquidation for complete mechanics.

Key points:

• Liquidation triggers when MMR reaches 100%

• 1% liquidation fee applies

• Partial liquidation reduces position to restore margin health

Forced Loan Closure (ADL)

Your loan may be forcibly closed if:

• A lender using their lent assets as collateral faces liquidation

• Pool is at 100% utilization, blocking their redemption

• ADL activates to free up liquidity

Impact:

• Your loan is closed without notice

• Your collateral composition may change

• Your total account value remains unchanged

This is not a loss—only your loan structure changes.

Interest Accrual

Interest accrues continuously and compounds. During high utilization periods, rates can spike significantly. Monitor your borrow cost and maintain sufficient collateral buffer.

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Risk Mitigation

For Lenders

Risk	Mitigation
Asset substitution	Accept that ADL may return USD in extreme cases
Redemption delays	Monitor utilization; redeem before peaks
Rate volatility	Understand rates are dynamic

For Borrowers

Risk	Mitigation
Liquidation	Maintain margin buffer well above MMR
Forced closure	Understand ADL may close your loan
Interest spikes	Monitor rates; repay during high utilization

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Further Reading

• Liquidation — Complete liquidation mechanics, ADL details, and API integration

• Utilization and Interest Rates — Rate calculation model