Lucidity users assume the risks associated with the protocol.

This section aims to provide an overview of various risks the user is exposed to and should be aware of. Although, this overview is not exhaustive and may not cover all potential risks to which you might be exposed.

While Lucidity strives to minimize these risks through careful design, rigorous testing, and thorough security audits, users should be aware of these potential risks, use the protocol responsibly and do their own research.

Smart Contract Risk

The protocol is built upon smart contracts that interact with multiple lending protocols in the background. While the contracts are rigorously tested and audited, there's always a risk of undiscovered vulnerabilities that may lead to loss of funds. This risk is inherent to all smart contracts in the DeFi ecosystem.

Protocol Risk

The protocol depends on the stability and security of the underlying lending protocols it aggregates. Should one of these protocols fail or suffer a security breach, it could impact the protocol and potentially lead to a loss of user funds. Furthermore, changes in the rules or mechanisms of the underlying protocols could impact the functionality and effectiveness of the protocol.

Oracles and Liquidation Risk

The protocol replicates the different risk parameters of the underlying lending protocols, such as oracles price feeds, health factors, liquidation thresholds, etc. As a result, the risks associated with the oracles, as well as the liquidation conditions, are identical to those of the underlying pools. Furthermore, any inaccuracies/manipulations/delays in the data provided by these oracles could affect the user's positions, and potentially lead to liquidations and/or loss of user funds.

Liquidity Risk

Given that the protocol operates by sourcing liquidity from various lending protocols, any sudden changes in the available liquidity in these protocols could affect the protocol’s ability to secure optimal loans for users.

This also includes liquidity concentration risk, where most of the liquidity for a given asset on a particular protocol is deposited by a few lenders. Any withdrawals from such lenders can lead to sudden hikes in borrow rates.

Governance Risk

The protocol can undergo adverse governance-based changes such as changes in lending parameters or onboarding a risky asset. Multi-sig participants or centralised token holders can also vote to change the protocol risk parameters adversely.

Market Risk

The protocol operates in the highly volatile crypto markets, which can experience significant price fluctuations. These fluctuations can impact the value of collateral and loans sourced through the protocol. Extreme market volatility could lead to significant losses for the protocol and its users.

Regulatory Risk

As the DeFi industry is still new and evolving, it is subject to a significant degree of regulatory uncertainty. Changes in laws or regulations, or the introduction of new laws or regulations, could impact the operation of the protocol, potentially leading to the restriction, suspension, or termination of the protocol’s services.

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