Overview

As with any financial service, there are inherent risks associated with using the platform. This document outlines some of the primary risks associated with Coupon Finance.

Smart Contract Risks

Bugs or Vulnerabilities

Smart contracts are code-based and may contain bugs or vulnerabilities that hackers can exploit. Even though the smart contracts have undergone thorough audits, it's impossible to guarantee that they're completely free from bugs.

Non-upgradeable

Coupon Finance is non-upgradeable, which reduces centralized attack vectors. However, this also means that in the event of an unforeseen attack or exploit, developers have limited options to intervene.

External Contracts

Assets that are unlent or being used as collateral are used by external protocols such as Aave to earn yield. This is called surplus management. If these external contracts are compromised, it could lead to a loss of funds for Coupon Finance as well.

Liquidity Risks

Coupon Shortage

If there aren't enough coupons on the market, depositors might be unable to withdraw their funds instantly. They must then wait for new depositors to sell coupons into the market or for borrowers to repay their debts.

Liquidation

If the value of the collateral drops, a loan might dip below the liquidation LTV, potentially leading to liquidation. Coupon Finance supports fractional liquidations, where loans are liquidated only until they reach a target LTV. To incentivize liquidations, Coupon Finance collects a liquidation fee.

Insolvency

When collateral value drops too quickly, it might not cover the borrowed amount, resulting in insolvency. In such an event, there's no incentive for liquidators or borrowers to pay back the debt, and the lender accrues bad debt. Unlike Aave, Coupon does not pool all assets, and each deposit asset has a list of compatible collateral and liquidation LTV values assigned to it. This means that when a specific collateral goes bad, only deposit assets connected to it are affected.