Risks

By using Leveros, which is built on Morpho Markets, you assume the risks associated with both platforms. Leveros introduces additional risks due to its leverage trading functionality and its use of Uniswap for executing leverage transactions. Below is an overview of various risks that you should be aware of when using Leveros.

This overview is not exhaustive and may not cover all potential risks you might encounter. Leveros, like Morpho, uses industry-leading security practices, but users must understand the risks inherent in decentralized financial protocols.

1. Smart Contract Risk

As with any decentralized finance platform, there is an inherent risk that Leveros or Morpho’s smart contracts could contain vulnerabilities or bugs. The smart contracts that power Leveros and Morpho are designed with security in mind, but no system is completely risk-free.

Mitigation Measures:

• Core contracts are immutable, preventing unauthorized changes.

• Leveros relies on Morpho's simple and publicly sourced code base, minimizing complexity.

More details about Morpho's security practices and reviews can be found in their respective documentation.

2. Oracle Risk

Each market within Leveros inherits the oracle risk from Morpho Markets. Every supported market is linked to an oracle that provides real-time price feeds. However, no oracle is completely immune to price manipulation or downtime, which could lead to liquidations or even bad debt.

When participating in a market, it is important to assess the reliability of the oracle by considering its centralization, the frequency of price updates, and the risk of manipulation.

3. Counterparty Risk

Before entering a market on Leveros, conduct due diligence on the loan asset and collateral assets you wish to trade with. Centralized governance over the asset, such as potential blacklisting by administrators, could pose a risk, as could assets with high centralization, leading to price volatility.

4. Liquidation Risk

Leveros inherits the liquidation mechanism from Morpho, which is triggered when a borrower's Loan-To-Value (LTV) exceeds the market’s predefined Liquidation Loan-To-Value (LLTV). In addition to this, users leveraging their positions on Leveros should be particularly cautious of liquidation risk due to the nature of leverage trading.

With leverage, small price movements can significantly impact the health of a position, making it more likely to reach liquidation thresholds. Borrowers must manage their positions carefully, ensuring that their LTV remains below the LLTV threshold to avoid liquidation.

Mitigation: Monitor your position in real-time, and either repay the loan or add more collateral to maintain a healthy LTV ratio.

5. Bad Debt Risk (for Lenders)

As with Morpho, there is a risk that the value of a position’s collateral could drop below the borrowed amount before liquidators are able to act. This could result in bad debt, where the borrower has no incentive to repay their loan. Leveros, like Morpho, has mechanisms in place to account for bad debts and socializes these losses among lenders, which can result in a proportional loss for each lender.

6. Liquidity Risk (for Lenders)

Liquidity risk refers to the availability of supplied assets for withdrawal. Lack of liquidity could prevent lenders from withdrawing their funds when desired. This risk is managed through interest rate models, but it is important to understand the liquidity dynamics of the market before providing liquidity.

7. Uniswap Risk in Leverage Transactions

Leveros uses Uniswap during the execution of leverage transactions. This introduces additional risks such as:

• Slippage: Sudden price changes during the swap process can cause users to receive less than expected.

• Liquidity Pool Risk: The depth of liquidity in the Uniswap pool can impact the execution price, especially during large trades.

• Transaction Fees: Leverage transactions that involve Uniswap incur additional gas and trading fees, which may erode profitability.

Users engaging in leverage trades must be aware of these risks and take them into account when managing their leveraged positions.

8. Leverage Trading Risk

Leverage amplifies both potential profits and potential losses. Because of this, positions are more susceptible to liquidation, and small price fluctuations can have a more significant impact on your collateral health. Leverage trading requires careful risk management, as liquidations could happen faster than in non-leveraged positions.

Mitigation: Before entering a leveraged position, ensure you understand the market volatility and manage your LTV closely to avoid liquidation.

Conclusion

Leveros inherits risks from Morpho Markets, including smart contract, oracle, counterparty, and liquidation risks. In addition, it introduces new risks related to leverage trading and its use of Uniswap for executing leverage transactions. Users are strongly advised to stay vigilant, manage their positions carefully, and understand the risks involved in both platforms.