From the user's perspective, the inherent risk within the protocol fundamentally revolves around the inability to retrieve one's invested capital. This scenario materializes when the deposit token reserve reaches a utilization rate of 100% - and it may arise due to two primary risk factors:
This section explores liquidity risk, which occurs when the demand for borrowing the token is excessively high relative to the available supply.
When a token experiences elevated borrowing demand, the liquidity reserves within the pool could be entirely depleted, rendering lenders incapable of withdrawing their assets. In the absence of bad debt, this situation doesn't inherently lead to financial losses for the lenders—in fact, it does result in exceptionally high interest rates being earned by lenders.
However, given that the protocol is engineered to afford lenders the freedom to withdraw their tokens at their discretion, such liquidity constraints are less than optimal.