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Risks related to using NillaConnect
Even with 3rd party smart contract auditors, they could theoretically have vulnerabilities. Integrated 3rd-party platforms may also carry smart contract risks.
We carefully screen any protocols we integrate with, only working with those that have been audited and shown a track record of good security.
Bug bounties and smart contract audits will soon be implemented to further mitigate this risk.
As leverage yield farming involves borrowing assets, the risk of liquidation is a possibility. This happens when the health factor (HF) goes below 1. The price of your assets inside the position can change due to price fluctuations, therefore when the total value of the position decreases to a certain threshold, or a position that only has a small buffer between your collateral value and borrowed value, this allows liquidation to take place.
This happens when the borrowing interest rate is higher than your yield farming gains. This means your debt position will grow faster than the value of your position. If this continues for a period of time, it could reduce the value of your position down to the level that triggers liquidation.
The likely causes that lead to this scenario are:
- 1.High protocol liquidity utilization, pushing up the interest rate.
- 2.A significant price drop in the rewards token diminishing the yield
Monitor your positions closely and always have a plan if APY turns negative - eg. close your position(s), wait and see, or add collateral to the position.
If utilization remains high for a period longer than a few days, the team will analyze the situation and likely raise the borrowing interest rate which should lower utilization according to the formula
Be more cautious when opening a position if the pool's utilization is high.
This happens if you try to open a large position relative to the pool size and require swapping, you transaction could incur a large price impact. Since our product automates the process of swapping and bridging to provide the most convenience for our users trying to complete complex actions, there may be some impact to your final value that is deposited.
You can set your own maximum price slippage to ensure that when a position requires swapping, bridging, and interacting with liquidity pools from aggregated protocols, your funds will not be affected by too much price slippage, as much as you set.
You may also break the strategy down into smaller chunks of fund to minimize the price impact in aggregated pools.
Suppliers don’t bear liquidation risks from leveraged positions like the protocol’s leveraged yield farmers. Instead, suppliers share the risk of the illiquidity of the pool.
Users may not be able to make withdrawals if the liquidity in the protocol is not enough. This may occur when the asset utilization rate is significantly high. In order to withdraw, either withdraw a smaller proportion or wait until the asset utilization drops.
NillaConnect has adopted the Triple-slope Interest rate model which incentivizes a healthy utilization ratio to mitigate the risk from illiquidity. See more details on the interest rate model here.
Despite our best efforts to minimize risks, DeFi is an industry where unforeseen events, also known as black swans, can occur. Therefore, it is highly advised not to invest your life savings or risk funds that you cannot afford to lose. It is essential to exercise caution with your funds, just as we are diligent with our code.