# Introduction

With Infinity Version 1.0, we looked to DeFi best practices to design a system that was familiar to users and yet could be adapted to be more robust. With our progression towards a more complex product suite and trading environment, we decided to drop the more user-friendly or 'basic' approaches in favor of more robust risk management. 

Infinity's new risk management system is built around is a **Portfolio Margin** (denoted, "PM") approach. PM provides the most capital efficient experience to end-users, however it requires a comprehensive system of risk monitoring and robust liquidation framework. 

One of the core risks that Portfolio Margining poses to DeFi protocols is idiosyncratic risk, that is, the risk that the price of a potentially overweighted single asset moves up/down quickly, or such asset/currency goes into default causing price discontinuities and potentially precipitous decline in all other assets. 

To mitigate these risks, Infinity has chosen to limit the assets to only very blue-chip or higher-quality type tokens and/or those with deep liquidity. Where new collateral assets may be accepted, Infinity will require that their credit risks be hedged fully.


# Framework

Each user's Trading Account is used to initiate and maintain lending and/or borrowing positions. Your Trading Account contains cash tokens, lending and borrowing positions on floating and fixed rate contracts.

**Assets** (denoted, "A"), refers to your aggregate Long (Cash + Lending) positions, while **Liabilities** (denoted "L"), refers to your aggregate Shorts (Borrowing) positions. Cash refers to any tokens in your Trading Account that is not in a lending or borrowing position.

Cash is valued at 100%, and compromises:

* Deposits/Withdrawal from the user
* Realized gains/losses from lending and borrowing positions opened then closed, or expired 
* Tokens received by initiating a borrowing position, or withdrawn by a lending position
* Interest paid/received on fixed rate position, or when exiting a floating rate position

Positions refer to either Lending or Borrowing positions, initiated either with a Market Order or a Limit Order that was matched.

For both lending and borrowing positions, we value the position by taking its **Present Value** (denoted, "PV"). For a detailed breakdown of the PV calculation, please refer [here](https://faq.infinity.exchange/product-guide/fixed-rate-markets#valuation). 

The **Net Asset Value** (denoted, "NAV") of your Trading Account is the sum of:

* Assets (A)
  * Cash
  * PV of your lending positions (designated with a positive value)
* Liabilities (L)
  * PV of your borrowing positions (designated with a negative value)

Each user should remain cognisant of their NAV, as this is used to calculate their portfolio value for the purposes of [Maintenance Margin](/portfolio-margin/maintenance-margin) under their Portfolio Margin.

Below is a summary of the main terms used and their definitions:

<table><thead><tr><th width="131.5">Abb.</th><th width="156">Term</th><th>Definitions</th></tr></thead><tbody><tr><td>Cash</td><td>Cash</td><td>Token not held in a lending or borrowing position.</td></tr><tr><td>Pos.</td><td>Position</td><td>Lending or borrowing positions, floating or fixed rate contracts.</td></tr><tr><td>PV</td><td>Present Value</td><td>PV is the sum of the position's cash-flow discounted.</td></tr><tr><td>A</td><td>Asset</td><td>Cash + PV(Lending Pos.)</td></tr><tr><td>L</td><td>Liability</td><td>PV(Borrowing Pos.)</td></tr><tr><td>NAV</td><td>Net Asset Value</td><td>NAV = A + L</td></tr></tbody></table>

Note: under the Portfolio Margin approach, each borrowing position is valued against the Assets in your Trading Account, and not a specific standalone asset. This approach introduces margining metrics such as Maintenance Margin and Initial Margin, along with Health Score and Max Borrow metrics. These terms are important to understand and defined in the following pages.


# Maintenance Margin

Portfolio Margin is designed to provide traders with potentially better leverage and flexibility in market positioning, alongside more efficient risk management.&#x20;

**Maintenance Margin** (denoted, "MM") is one of the core tenets of Portfolio Margin. MM is the minimum amount of margin (each user's "NAV Threshold") that you must hold in your Trading Account, below which liquidation would start.

* MM is NAV less Stressed NAV (denoted, "StrNAV"), or *MM = NAV - StrNAV*
* MM expressed as a percentage (denoted, "MM%") is MM divided by NAV, or *MM% = MM / NAV*

The purpose behind StrNAV is to calculate your adjusted NAV (recall, your Assets + Liabilities) for a parameter of stress scenarios. These stress scenarios draw from previous and potential market conditions to simulate liquidation under adverse conditions, and thereby the reasonable loss that your NAV would be calculated to incur under various market conditions (outlined under Risk Matrix, in the next section) taking into account Market Risk and Liquidity and Depeg Risk. Other risk components such as Credit and Operational risks are highlighted for user's reference.&#x20;

The parameters to calculate StrNAV are updated and calculated every 10 minutes, on a continuous basis, from which an implied liquidation penalty (denoted, "liqPenaltyFee") is added. In essence, MM represents the delta between your NAV and StrNAV, the latter of which would decrease (and increase the delta, or MM) as you create new positions, whether lending or borrowing, as their present value is stressed against the prevailing market rates.

$$
MM=NAV-StrNAV   \ StrNAV >0 ⇔ NAV>MM ⇔ MM%<100%
$$

When your NAV drops below your NAV Threshold, liquidation will begin to reduce (and pay back) your liabilities by selling some of your Assets (recall, your Cash + PV(Lending Positions)):

$$
MM=MM(L)+\frac{PV(L)}{{PV(A)}}\times MM(A)+liqPenaltyFee
$$

The *liqPenaltyFee* is calculated by a 5% buffer on your notional Assets, adjusted by the present value of your liabilities over assets:

$$
liqPenaltyFee=5%\times\frac{PV(L)}{{PV(A)}}\times Notional(A)
$$

Under the Portfolio Margin approach, MM is used to calculate your Initial Margin and Health Score, outlined in the next section.


# Initial Margin & Health Score

## Initial Margin (IM)

Initial Margin (denoted, "IM") is the value of Assets set aside in your NAV to initiate a new lending or borrowing position. Once the position has been created, your newly created position forms part of your NAV, which is subject to [Maintenance Margin](/portfolio-margin/maintenance-margin), on an ongoing basis.

Currently, IM is set at 1.5 times your MM, or *IM = 1.5 x MM*.

* Note: the 1.5 figure is not fixed, and may change (up or down) depending on market conditions
* IM expressed as a percentage (denoted, "IM%") is IM divided by NAV, or *IM% = IM / NAV*

After your new position is created, there is a negligible impact on your recalculated NAV (denoted "NAV*after*"), since your newly created position is valued at par (excluding small slippages), but thereafter have a direct impact on your MM (and thereby IM, which is a multiple of MM):

$$
NAV\_{before}=NAV\_{after}=NAV\IM\_{after}=IM\_{before}+ \Delta IM\ MM\_{after}=MM\_{before}+ \Delta MM
$$

In order to initiate a new position, the newly created position must satisfy the following criteria post facto:

$$
NAV\_{after}>IM\_{after} \iff \Delta IM\<NAV - IM\_{before}
$$

It's important to note that, if your Trading Account's margin is less than IM and greater than MM, you would not be able to initiate any new positions, at the same time you would not be liquidated (until your margin drops below MM). In order to initiate new positions, any or a combination of several non-exhaustive factors could occur to bring your margin higher than IM:

* Transfer-in Cash to your Trading Account
* Reduce your outstanding lending and borrowing positions (as their aggregated present value is negatively correlated with the delta between your NAV and StrNAV)
* Favourable move in prevailing market rates, thereby reducing the impact on your StrNAV (and resulting in its lower delta to your NAV)

## **Health Score (H/S)**

Health Score (denoted, "H/S") is a numeric representation of your assets and liabilities.

* Health Score is your NAV divided by MM, or *H/S = NAV / MM*
* Liquidation of your Trading Account occurs whenever your H/S is equal or lower than 100%


# Max Borrow

When initiating a new borrowing position, the maximum notional amount you could borrow is called the Max Borrow indicator. When you [Create a Position](https://faq.infinity.exchange/lending-and-borrowing/creating-positions#create-a-position), there will be an indicator with the maximum number of tokens you could either lend or borrow, in any given market.

For Max Borrow, the figure shown is calculated in isolation to Portfolio Margin, and provides an indicative amount by applying a loan-to-value (denoted, "LTV") approach, for time/space calculation considerations.

Currently, Max Borrow associated with an asset is defined as:

$$
maxBorrow(A\_i)=A\_i\times\frac{LTV}{{1-LTV}}+L
$$

Where Liabilities = Present Value of Borrowing Positions, which represents the present value of your Trading Account's liabilities (where liabilities are a negative figure).

Current LTV per asset used for this purpose (to be updated periodically, based on market conditions):

* Basic Tokens:

<table><thead><tr><th width="336">Accepted Collateral</th><th>LTV</th></tr></thead><tbody><tr><td>USDC</td><td>85%</td></tr><tr><td>USDT</td><td>85%</td></tr><tr><td>DAI</td><td>77%</td></tr><tr><td>ETH</td><td>82%</td></tr><tr><td>WBTC</td><td>70%</td></tr></tbody></table>

* Deposit Tokens:

<table><thead><tr><th width="335.9151025600464">Accepted Collateral</th><th>LTV</th></tr></thead><tbody><tr><td>Aave aTokens</td><td>95%</td></tr><tr><td>Compound cTokens</td><td>95%</td></tr></tbody></table>

* Complex Tokens:

<table><thead><tr><th width="298.9906570379338">Accepted Collateral</th><th>LTV</th></tr></thead><tbody><tr><td>Curve LP Tokens</td><td>75%</td></tr><tr><td>Uniswap LP V3 NFT Tokens</td><td>75%</td></tr></tbody></table>

&#x20;


# Market Risk

By creating lending and borrowing positions in different tokens, across different tenors, you are exposed to three types of market risks:

* **Interest Rates Risk:** You lock-in a fixed rate borrowing position for a particular tenor. Over time, the market may price the par rate of your position's maturity at a different level. Your position, on a mark-to-market basis, could therefore be making or losing money, depending on whether you are borrowing at a cheaper or more expensive rate than the prevailing market rate. In other words, your positions are sensitive to interest rates movements, a sensitivity which increases with time to maturity.
* **FX Risk:** You enter a fixed rate borrowing position in a certain market (e.g. ETH-1M), which is backed by your Assets as collateral. While you have an ETH-denominated borrowing position, your collateral may not necessarily (need to) be ETH-denominated. Therefore, your MM is subject to FX risk. At Infinity, all tokens are valued ([unit of account](/risk-matrix/liquidity-and-depeg-risk/depeg-risk)) back to USD, therefore any FX risk is measured against USD.
* **Correlation Risk:** Depending on the product, you may also be exposed to Rates-Rates or Rates-FX Correlation risk. In the case the product itself is not sensitive to these risks, the liquidation logic would capture the correlation between tokens for optimal execution. Therefore, if not directly via the product, you would still be subject to [Correlation](/risk-matrix/market-risk/correlation) risk via Liquidation.

The following pages dive deeper into each of these risks.


# Rates Risk

On your **Risk Overview** page, you can view your exposure to changes in interest rates, under **My Risk Positions** by contract or calendar period (monthly, quarterly, semi-annually, or annually).&#x20;

Figures displayed under My Risk Positions (with DV01 and USD selected) shows your dollar value (sensitivity) change (in present value) from a 1 basis point (denoted, "bps") increase in each contract's interest rate (denoted as, "DV01").

* With a fixed rate lending position, your DV01 would be a negative figure
* With a fixed rate borrowing position, your DV01 would be a positive figure

At current, Infinity's fixed rate contracts are up to 4Q (or 1Y) tenor, and therefore pivot points are 3M, 6M and 9M. As we extend the longest tenor (beyond 4Q) of our fixed rate contracts, the below tables and pivot points will be updated accordingly.

Within Rates Risks, some of the key ways the yield curve could behave include:

* Parallel Move, up or down
* Slope Shift, becoming steeper or narrower
* Curvature, becoming (more) convex or concave

## **Parallel Move**

Under Parallel Move, your positions along the curve would be sensitive to a +1 bps shift upwards across the entire yield curve.

To view your sensitivity under My Risk Positions, you could aggregate your net positions by month (in the below example) or by contracts, to have a clearer view of your exposure:

| Monthly | WBTC     | ETH         | USDT     | USDC   | DAI      |
| ------- | -------- | ----------- | -------- | ------ | -------- |
| 1M      | 0        | (284)       | 0        | 0      | 4        |
| 2M      | 0        | 0           | 0        | 0      | 0        |
| 3M      | (30)     | 0           | 104      | 84     | 0        |
| 4M      | 8        | 0           | 0        | 0      | 0        |
| 5M      | 0        | 0           | 0        | 0      | 0        |
| 6M      | 0        | 0           | 0        | 0      | (48)     |
| 7M      | 0        | 0           | 0        | 0      | 0        |
| 8M      | 0        | 0           | 0        | (59)   | 0        |
| 9M      | 0        | 0           | 0        | 0      | 0        |
| 10M     | 0        | (7,754)     | (119)    | 0      | 0        |
| 11M     | 0        | 0           | 0        | 0      | 0        |
| 12M     | 0        | 0           | 0        | 0      | 0        |
| Sum     | **(21)** | **(8,038)** | **(15)** | **25** | **(44)** |

For example, the ETH-1W market, the (284) represents the DV01 figure shows that if the 0 (FLOAT) to 1M part of the curve moves up by +1 bps, you would experience a loss of $284 in present value, assuming all else equal (i.e. no changes in FX).

## **Slope Shift**

Under Slope Shift, your positions along the curve are calculated with a shift in the slope by making it steeper (shorter tenor rates decrease, longer tenor rates increase) and flatter (shorter tenor rates increase, longer tenor rates decrease). For example,

* Flattening the prevailing market's curve would shift the 1D market by +1 bps and 4Q market by -1 bps, leaving the pivot point of 6M (180 days) unchanged
* Steepening the prevailing market's curve would shift the 1D market by -1 bps and 4Q market by +1 bps, leaving the pivot point of 6M (180 days) unchanged

<figure><img src="https://2423071705-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Fyh24W7eBgHtzFxoqGVyl%2Fuploads%2FznqNuPJJxyOv3eIYXlGF%2Fimage.png?alt=media&amp;token=879f1704-77e7-4992-9017-196bdbd0886a" alt="" width="483"><figcaption><p>Short-end and long-end shift with a 100 bps move in opposite ways, while the pivot point remains unchanged</p></figcaption></figure>

On your Risk Overview page, you can approximate your exposure to Slope Shift by aggregating your net positions, along the entire yield curve, on a semi-annual basis, rather than viewing by contract, month, quarterly or annually.

Following on the the example taken above:

| Semi-Annual | WBTC     | ETH         | USDT     | USDC   | DAI      |
| ----------- | -------- | ----------- | -------- | ------ | -------- |
| H1          | (21)     | (284)       | 104      | 84     | (44)     |
| H2          | 0        | (7,754)     | (119)    | (59)   | 0        |
| Sum         | **(21)** | **(8,038)** | **(15)** | **25** | **(44)** |

Based on the portfolio composition, a flattening of the curve would be favourable for the the H1 contracts of USDT and USDC. As the curve flattens, shorter tenor rates increase and longer tenor rates decrease. This results in a positive mark-to-market for shorter tenor borrowing positions and longer tenor lending positions, under a flattening curve. Similarly for the H2 contracts of USDT and USDC, when (longer tenor) rates go down, you would experience a positive mark-to-market since the aggregate sensitivity would be multiplying a negative DV01 figure (e.g. (119) for USDT in H2) by a -1 bps change in rate (instead of a +1 bps sensitivity shown in the table).

## **Curvature**

Under Curvature, your positions along the curve would be sensitive to the yield curve's convexity, either becoming more 'convex' or 'concave'. The below example is a yield curve becoming more concave, with the short- and long-end shift lower (by -100 bps) and midpoint (6M) shift higher (by +50 bps). Conversely, the yield curve would become more convex if the short- and long-end increased (+100bps) and midpoint (by -50bps).

<figure><img src="https://2423071705-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Fyh24W7eBgHtzFxoqGVyl%2Fuploads%2FRdvpnPj3ENHv2vgyNvOM%2Fimage.png?alt=media&amp;token=8f0340bb-824b-4764-b762-7ea313dd5a51" alt="" width="486"><figcaption><p>Q1 and Q4 go down while Q2-3 go up. Pivot points around 3M and 9M unchanged.</p></figcaption></figure>

To read your exposure to curvature, the best aggregated view under Risk Overview would be by Quarter.

| Quarterly | WBTC     | ETH         | USDT     | USDC   | DAI      |
| --------- | -------- | ----------- | -------- | ------ | -------- |
| Q1        | (30)     | (284)       | 104      | 84     | 4        |
| Q2        | 8        | 0           | 0        | 0      | (48)     |
| Q3        | 0        | 0           | 0        | (59)   | 0        |
| Q4        | 0        | (7,754)     | (119)    | 0      | 0        |
| Sum       | **(21)** | **(8,038)** | **(15)** | **25** | **(44)** |

As the curve gets more concave, the 0-3M (Q1) part of the curve goes down, the Q2 and Q3 (3M to 9M) go up while Q4 (9M to 12M) goes down. Therefore, from the above table, we infer:

* For ETH, a more concave yield curve would be in favour, as the net ETH positioning sensitivity is negative when the curve goes down in both Q1 and Q4 => the impact is positive
* For USDC, a more concave yield curve would not be in favour, as the net USDC positioning sensitivity is positive, with a negative impact on Q1 and Q3 positions


# FX Risk

The main unit of account is USD. This means that each position that comprises your NAV (cash + present value of assets and liabilities) is valued in USD.

Based on the [eligible collateral](https://faq.infinity.exchange/deposits-and-withdrawals/eligible-collateral) in your Trading Account, you are subject to foreign exchange (denoted as, "FX") risk (e.g. you holding a borrowing ETH position, priced as ETH/USD, where the price of ETH goes up, the present value of your liability in USD terms goes up, assuming no change in ETH interest rate). For example, if you are in a:

* Lending position, you would be long the FX risk, i.e. long the token/USD pair
* Borrowing position, you would be short the FX risk, i.e. short the token/USD pair

A simple example on why a borrowing position is short the FX risk is where you have stablecoin(s) (e.g. USDC) in your Trading Account and created a ETH borrowing position (e.g. 10 ETH).

* As the price of [ETH/USD](https://pyth.network/price-feeds/crypto-eth-usd) goes up (e.g. from 1,800 to 2,000), the amount of ETH you owe would increase in USD terms, or put another way - the amount of ETH your USDC could purchase, under a liquidation scenario, decreases as the price of ETH/USD increases
* Separately, since USDC is a stablecoin, its price relative to USD ([USDC/USD](https://pyth.network/price-feeds/crypto-usdc-usd)) may fluctuate greater or less than 1. In the event of a depeg (where the USDC/USD price deviates materially away from 1), you would be subject to an additional FX risk, since, in the case of a depeg downwards, the USD value decreases as the price of USDC drops below 1
* Put together, if the price of ETH goes up and the price of USDC goes down, in USD terms, you would be negatively affected by FX risk in both ways
* Note: under the Portfolio Margin approach, Infinity's risk framework would take into account all of the tokens comprising your NAV

Mechanically, let’s take the example of holding a fixed rate lending position in ETH.

* PV(**USD**) denotes the present value of your ETH fixed rate lending position, in **USD** terms
* PV(**ETH**) denotes the present value of your ETH fixed rate lending position, in **ETH** terms

$$
PV\_{USD}=\sum\_{i} B\_{USD}(0,i)\times CF\_{USD,i}\\=\sum\_{i} \frac{1}{{(1+r\_{USD}(0,i))^i}}\times CF\_{ETH,i}\times FX(0)\times  \frac{(1+r\_{USD}(0,i))^i}{{(1+r\_{ETH}(0,i))^i}}\\=\sum\_{i} \frac{1}{{(1+r\_{ETH}(0,i))^i}}\times CF\_{ETH,i} \times FX(0)=PV\_{ETH} \times FX(0)
$$

In the formula above, PV(USD) is a function of spot FX (ETH/USD) and PV(ETH), the latter shown as *r(ETH)*. Note: *r(USD)* does not intervene here and therefore, there is no sensitivity to the interest rate differential between USD and ETH, or put another way - no sensitivity to FX forwards

**=> All FX exposure are treated as spot FX exposure. There is no exposure to FX forwards.**

Under My Risk Positions, in the Risk Overview page, a breakdown of the present value of your net positions are shown, either in local currency (e.g. ETH = ETH, or ETH in USD terms), grouped by contract or period (e.g. month, quarter, semi-annual, annual). For example, the below graph would be "PV By Monthly".

* To calculate your net position delta in USD, you would divide the figures by 100. In the 1M bucket, if the ETH/USD price goes up +1 bps, your PV would decrease by $(28), while your in aggregate you are up $4,257.

| Monthly | WBTC      | ETH         | USDT        | USDC        | DAI         |
| ------- | --------- | ----------- | ----------- | ----------- | ----------- |
| 1M      | 0         | (2,831)     | 0           | 5,000       | 4,563       |
| 2M      | 1         | 1           | 0           | 500,000     | 50          |
| 3M      | (0)       | 0           | 10          | 8,418       | 5,000       |
| 4M      | 896       | 5,000       | 0           | 0           | 50          |
| 5M      | 50        | 1           | 500         | 5,000       | 5,000       |
| 6M      | 0         | 500         | 500,000     | 5           | (0)         |
| 7M      | 0         | 0           | 1           | 0           | 5,000       |
| 8M      | 5         | 50          | 1           | (58,131)    | 1           |
| 9M      | 0         | 1           | 5,000       | 50          | 0           |
| 10M     | 1         | (77,538)    | (1,182)     | 5           | 5           |
| 11M     | 5,000     | 500         | 0           | 50          | 1           |
| 12M     | 500       | 500,000     | 0           | 50          | 500,000     |
| Sum     | **6,452** | **425,682** | **504,329** | **460,447** | **519,669** |


# Correlation

Lending and borrowing positions in Infinity are not exposed to (FX,FX) or (FX,Rates) correlation risks. For example, with an ETH-1D fixed rate lending position, the present value of your 1-day ETH lending position could be expressed in either USD, PV(*USD*), or ETH, PV(*ETH*), terms:

$$
PV\_{USD}=PV\_{ETH}\times FX(0) = \frac{{1 + X \cdot T}}{{(1 + r(0,T))^T}} \cdot FX(0)
$$

"X" is the ETH fixed rate and T= 1 / Actual Days (365, or 366), where:

* PV(USD) is a function of PV(ETH) and FX(0), where PV(ETH) is the zero coupon rate r(0,T), both observed at T=0
  * **=> PV(USD) is not sensitive to the (Rates, FX) correlation**
* PV(ETH) is a linear combination of PV in a similar format to the PV(USD) above
  * **=> PV(ETH) is not sensitive to the (FX, FX) correlation**

Correlation between assets (FX,FX) or (FX,Rates) will be applied during the liquidation order. Similarly, for margining, in particular your [Maintenance Margin](/portfolio-margin/maintenance-margin), which depends on the stresses applied [FX](/risk-matrix/market-risk/fx-risk) and [Rates](/risk-matrix/market-risk/rates-risk) (across the yield curve).

Note: stressing FX and Rates separately and then aggregating their impact is different from stressing Rates and FX simultaneously. To illustrate this point, let’s denote PV=f(r,FX):&#x20;

* If we bump Rates and FX separately, the impact of dPV:

$$
dPV = df = \frac{\partial f}{\partial x} \cdot dx + \frac{\partial f}{\partial y} \cdot dy
$$

* If we bump both Rates and FX simultaneously, the impact of dPV is:

$$
dPV =df= \frac{\partial f}{\partial x} \cdot dx + \frac{\partial f}{\partial y} \cdot dy + \frac{\partial^2f}{\partial x \partial y} \cdot dxdy
$$

In our case:

$$
\frac{\partial^2f}{\partial x \partial y} \ \sim -T\*(1+XT)<0
$$

To maximize the impact (and apply a larger stress for StrNAV), we want dxdy>0, where Rates (r) and FX move in the same direction. In this case,

* The impact of bumping both FX and Rates simultaneously will be greater than adding the individual impacts of bumping FX and Rates in isolation, and vice versa where FX and Rates move in the opposite direction. Though, in practice, one would assume that a rise in the ETH/USD FX would be positively correlated with ETH Rates.


# Liquidity & Depeg Risk

Infinity can accept a broad, and diverse set of collateral from:

* Basic tokens like ETH, USDT, USDC, DAI, WBTC, to
* Yield-Bearing tokens like Aave's aTokens, and Compound cTokens, to
* Liquid Staking tokens like Lido's stETH, to
* Real World Assets, like OpenEden, MatrixDock or Ondo Finance's tokenized money market funds and short-term US Treasury bills

**Liquidity Risk** results from a difference in the underlying liquidity and number of trading venues available for each token. In addition, fixed rate positions traded in Infinity have no natural 'hedge' or offsetting position on other exchanges (given the limited number yield curve protocols), which may similarly results in illiquidity concerns.

**Depeg Risk** results from the potential price deviation (away from 1) in stablecoins, which may occur for several endogenous and exogenous factors. As tokens in Infinity are priced in USD, a depeg in stablecoins (such as USDT, USDC, DAI) in Cash or PV(Asset) depeg would be devalued, and potentially cause a widening of your Maintenance Margin, as a result of a larger deviation in your Stressed NAV, depending on the composition of your portfolio (in particular whether you have a FX mismatch in your cash + assets vs. liabilities).

The following pages detail the liquidity risks mentioned above.&#x20;


# Liquidity Risk

Infinity offers floating and fixed Rates markets, enabling lending and borrowing, against a certain number of collateral, along different contract tenors. During the liquidation of, for example, a fixed rate borrowing position (e.g. ETH-2Q), some of your cash and/or assets would be sold.

Liquidity Risk may arise where:

* In the case of assets being sold, where the specific collateral only trades in a specific venue (or a limited number of venues), e.g. yield-bearing tokens such as cTokens & aTokens; conversely where you hold a fixed rate lending position (recall, which is a PV(Asset)), an off-setting fixed (or floating) rate borrowing position would be created
* In the case of the fixed rate borrowing position, the liquidation system would seek liquidity by creating a fixed (or floating) rate lending position.
  * For floating rate positions, in addition to Infinity, there are also markets like Aave and Compound; however
  * For fixed rate positions, Infinity is the only market available to provide an offsetting position, in order to close the (being liquidated) fixed rate borrowing position, in the case of fixed rate markets.

Infinity's margin system takes into account these risks by applying larger stresses for fixed rate lending (asset) or borrowing (liability) positions, resulting in a higher margin required per notional unit, depending whether it's an asset or liability.


# Depeg Risk

Infinity's main unit of account is USD

* All FX pairs (ETH/USD, WBTC/USD, USDC/USD, etc.) will be quoted against USD as the counter currency and, as such, all positions are subject to token/USD exchange risk&#x20;
* Positions are quoted in USD and settled in the base currency (ETH, WBTC, USDC, etc.)

For stablecoin/stablecoin pairs (USDC/USD, USDT/USD, DAI/USD), the depeg risk is also a risk users are exposed to, where you are borrowing stablecoin A and lending stablecoin B, and stablecoin B depegs, thereby resulting a decrease in your PV(Assets) in USD terms.

While Infinity has factored in depeg risk via macro hedges and buffers, we would not be insulated against a materially large depeg.


# Credit Risk

Each user is subject to credit risks in the context of:&#x20;

* **Eligible Collateral**: This relates to an underlying asset's credit exposure, for example tokenized US Treasury collateral, in the event that the US Treasury defaults on its obligations.&#x20;
  * Where assets carry credit risk beyond what might typically be deemed 'sovereign' or 'blockchain' risk, this credit risk may be either partially or fully hedged, with Infinity buying protection, via a credit default swap (CDS), to isolate the impact from a risk of default. Premiums charged on the CDS would be passed-through / deducted from your Trading Account.
* **Infinity Credit Risk**: while all efforts have been deployed to provide a robust margining system and efficient liquidation engine, you are, to an extent, exposed to Infinity's credit risk.&#x20;
  * Note however, that collateral assets are held on-chain in smart contracts providing the transparency DeFi users have become accustomed to and expect.

In respect of the above, the initial methods to mitigate these credit risks include:

* **Infinity Insurance Fund**: the Insurance Fund (denoted, "iFund") is established by a combination of PnL contribution and partial or full net balances resulting from the [liqPenaltyFee](/portfolio-margin/maintenance-margin). iFund is applied to aggress any shortfall on portfolio liquidations.
* **Protocol Health Metrics**: under "Explorer" on Infinity's website, the aggregate health score and risk sensitivity to token price and rate movements demonstrates the Infinity protocol's exposure (e.g. concentration) by token and external external counterparty.
* **Central Clearing Counterparty** (in future): partner with a CCP that takes on the counterparty credit risk between all users within Infinity, thereby streamlining transactions, increasing capital efficiencies and reducing risk for all users.


# Operational & Other Risks

Operational and other risks encompass (but not limited to):

* Smart Contract Risk
* Gas Scarcity / Price Risk
* Decentralization / Multi/Cross-Chain Opportunities

Further details on these in the following pages.


# Smart Contract

For high-volume, highly audited protocols, we rely on audits and public information as a guide for evaluating smart contract risk. Elsewhere, with new protocols, a deeper analysis is performed with our general framework revolving around the following:

**Code Vulnerabilities**: Contracts may have coding errors or vulnerabilities that can be exploited by attackers, for example with reentrancy attacks, integer overflows, and more..

**Security of External Dependencies**: Smart contracts may rely on external data sources, such as oracles, to function properly. If these external dependencies are compromised or can be manipulated, it can introduce significant risk to the smart contract.

**Regulatory and Legal Risks**: Some smart contracts operate within an existing legal framework, and their execution must comply with relevant laws and regulations. Failure to consider these aspects may result in legal challenges or regulatory interventions.

**Economic and Game Theoretical Risks**: Smart contract protocols often rely on specific economic assumptions and game theoretical incentives to function optimally. However, the assumptions made during the design might fail in real-world scenarios, leading to security vulnerabilities.&#x20;

**Governance Risks**: Smart contracts are typically decentralized and governed by consensus mechanisms. However, disagreements or disputes within the community can lead to forks or contentious changes, potentially impacting the stability and integrity of the contract.

**Upgradability Risks**: Some smart contracts may have upgradability features to fix issues or introduce new functionalities. However, this introduces the risk of unintended consequences or malicious changes if the upgrade process is not carefully managed.


# Gas / Orcale Price Risk

**Gas Price Risk**: the Ethereum Blockchain has faced scalability and performance issues when handling a high volume of transactions. As a result, high gas fees, congestion and/or network delays not only affect the performance and reliability of smart contracts but ultimately delay transaction settlement resulting in increased settlement and credit risk.&#x20;

* During periods of stress, market participants trade concurrently and with the scarcity of gas at on layer 1s (in the case of Ethereum, 30 million gas per block), only a handful of transactions can be processed irrespective of the gas fees/premiums paid. Significant work will be required to create a high-fidelity experience in the future.

**Oracle Price Risk**: price oracles brings valuable financial market data to DeFi applications, by aggregating and publishing first-party price data on-chain for us by either on- or off-chain applications. The risk associated with price oracles consists of a manipulated feed or stream of wrong price(s) input to the smart contract, falsely reducing or increasing the price (value) of an asset, thereby creating an arbitrage opportunity for the manipulator.

To mitigate this potential risk, oracle providers could improve or maintain,

* The robustness of their price aggregation alongside a diversity of publishers (individuals or entities publishing price feeds in exchange for fees) are ways to decrease the risk of price manipulation
* Their governance standards to determine high-level parameters of ecosystem mechanisms and methodologies


# Future Proofing

Infinity is committed to a fully decentralised, multi/cross-chain future.

Stay tuned for updates.


# Overview

Infinity runs a competing dual-channel External/Internal liquidation process for Tokens, Floating Rate Positions, and Fixed Rate Positions in an attempt to achieve the best execution. In this process, it simultaneously:

* Externally: seeks bids from counterparties for such positions, and
* Internally: queries other exchanges in the background (e.g. Uniswap) for prices

Within five (5) seconds, Infinity will then automatically liquidate positions at the best price via the respective channels accordingly. When an account is liquidated, a **\[ 5 ]%** charge on assets is taken as a penalty fee and split 50/50 between the Infinity Treasury and the Liquidator.&#x20;

## Which Assets Do We Liquidate?

In determining which assets to liquidate, we take into account:&#x20;

* the biggest contributors to risk
* the liquidity of the underlying markets both on Infinity, and externally&#x20;
* the correlation of such assets