Borrow-Related Risks

Liquidation risk

The liquidation risk increases when your debt grows relative to your collateral value. This can happen because interest accrues, collateral prices move, or pool parameters change. Health Factor is the key indicator to watch. If your Health Factor drops below 1.0, your position can be liquidated, which means part of your collateral may be sold to repay the loan and you will pay a liquidation penalty.

WARNING

If your Health Factor starts trending down

The simplest way to reduce risk is to keep a buffer by borrowing less than your maximum, repaying some of the loan, or adding more collateral when needed.

Market and parameter changes

Rates, LTV thresholds, fees, and other pool settings may update over time, which can increase borrowing costs or bring you closer to liquidation. All parameter changes go through a time-lock, so you'll have advance notice before they take effect. If you have active borrows, plan to monitor your position after parameter updates and during volatile periods.

Oracle circuit breaker

During extreme price moves, the market's price oracle may temporarily stop returning updated prices. The oracle is configurable per market and can be any SEP-40-compliant oracle. As a borrower, this directly affects you: actions that depend on price validation — such as borrowing more, withdrawing collateral, or being liquidated — are paused until the oracle resumes.

This means your position is temporarily frozen in both directions. You can't take on more risk, but you also can't be liquidated on a stale or anomalous price. Once price updates resume, all actions become available again, and liquidations can proceed if your position is unhealthy at the new price.

If the market contract uses an aggregated oracle solution (which is partially SEP-40 compliant and can be chosen once in a protocol by the market admin), it both computes the median price from the configured sources (existing oracle solutions) and also comes with a circuit breaker feature that prohibits the price discovery if the deviation between consecutive medians exceeds the configured maximum.

Smart contract risk

As a borrower, your collateral is locked in the protocol's smart contracts and your debt accrues interest continuously. While Alula is built to be secure, on-chain protocols can still face risks such as bugs, unexpected edge cases, or exploits during extreme market conditions. Avoid borrowing close to your maximum capacity, monitor your Health Factor during volatility, and only borrow amounts you can manage if market conditions change unexpectedly.