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By using Sentiment, you assume the risks associated.

The following section provides an overview of different types of risks you should be aware of when using Sentiment.

This list is non-exhaustive and users may face additional risk not documented below.

Smart Contract Risk

The Sentiment Protocol is a set of smart contracts that persist on the Ethereum Virtual Machine and EVM based L2s. Smart contracts are immutable code that has exposed functionality which any user can interact with, thus any vulnerability is exposed to exploitation. Exploits can lead to loss of user funds within the protocol.

Several preventative measures have been taken during the development of the protocol to mitigate smart contract risks:

  • Security Audits
  • Bug Bounty Programs
  • Code simplicity and separation of logic
  • Open Source code, encouraging open collaboration and bug reports

Solvency Risks

Given Sentiment is a permissionless lending protocol, solvency is a risk faced by depositors.

Liquidity Risk (For Lenders)

Lender deposits in a Super Pool or Base Pool is subject to be lent to borrowers. In the event of high utilization of lent assets, lenders may be unable to withdraw deposits for a period of time. Interest rates are designed to incentivize additional deposits or repayments in time of high utilization, but liquidity can not be guaranteed at all times.

Liquidation Risk (For Borrowers)

In order to maintain solvency for lenders, a liquidation mechanism has been designed to liquidate risky borrower positions and repay funds to corresponding lending pools. As a borrower, if your position crosses a risk threshold, your position will be liquidated and you will lose your collateral and any assets within your position. To ensure solvency as a borrower, its recommended to not over-leverage your position, and ensure your position is within the appropriate risk thresholds.

Bad Debt (For Lenders)

Sentiment has a risk management and liquidation system to prevent from bad debt, but crypto assets have a history of extreme volatility for periods of time. There is a risk that borrower positions cross risk thresholds and are not able to be effectively liquidated. In this event, there will be bad debt in the system. Bad debt will render some lender deposits insolvent resulting in capital losses for depositors. Sentiment Protocol aims to create an insurance fund, which would provide relief in the event of a bad debt shortfall in the system.

Oracle Risks

Base Pool markets rely on oracle price feeds to accurately manage accounting within the system. This external reliance can be a point of failure if oracles report inaccurate prices or have liveness failures. If oracles fail to report accurate prices, users are at risk of loss of funds. Borrowers may be unjustly liquidated, or be able to unjustly borrow more assets than appropriate. In any event, both lender and borrower assets are at risk if oracles fails.