Risks

Actions on Vectis are inherently subject to various risks. To maintain the protocol’s stability and safeguard users, Vectis has implemented a comprehensive risk management framework that continuously monitors and mitigates these risks.

Smart Contract Risks

Users are primarily exposed to smart contract risks from two sources: the JLP contract from Jupiter and the Vectis contracts. If the JLP contract is compromised, its price may drop significantly, resulting in a discrepancy between the price and the actual assets in the pool (AUM). This could cause a depeg in vUSDC or vSOL, as these tokens rely on JLP for yield generation.

In a similar scenario, if Vectis contracts are compromised, the AUM may fall below the total supply of v-tokens, potentially causing the tokens to depeg.

To mitigate these risks, Vectis contracts are thoroughly audited by renowned firms. Additionally, the contracts are open to white-hat inspections, enabling the community to further ensure asset security.

Liquidity Risk

Low-liquidity tokens may experience significant slippage when large amounts are traded, leading to potential losses. To reduce this risk, strategies are designed around blue-chip tokens with high market capitalization and liquidity, minimizing the impact of slippage for investors.

Liquidation Risk

Leverage strategies also carry a liquidation risk if borrowing interest rates exceed the yield from JLP over an extended period. This scenario could result in a net outflow, with debt growing faster than the asset value, ultimately bringing the health ratio closer to the liquidation threshold.

Monitoring positions regularly and maintaining a Loan-to-Value (LTV) ratio below 50% is encouraged to mitigate liquidation risk, particularly when dealing with volatile assets.

Risk of Bad debt

Bad debt arises when borrowers fail to repay their loans, often due to significant market volatility. If the collateral value drops sharply, it may fall below the required threshold, leaving lenders unable to recover the full amount borrowed.

To address this risk, a Dynamic Liquidation Mechanism is in place, which continuously monitors collateral values and automates liquidations to swiftly manage under-collateralized loans.