Bad Debt

What is Bad Debt risk?

Bad debt is where a lender is unable to withdraw their initial deposit since the market will have insufficient tokens to repay them even after liquidation of all borrower's collateral.

Bad debt may be a consequence of any of the risks we have mentioned previously.

What precautions has Silo taken to prevent this?

Risk-Isolation

Regardless of precautions taken, bad debt remains a possibility of any lending market, including Silo. However, Silo's architecture is completely different from other lending markets in the fact that we are risk-isolated by design.

Silo is composed of multiple individual lending markets rather than being a single market with pooled tokens. This means that bad debt to a single market cannot spread to others since one 'base asset' (Base and Bridge Assets) cannot be used as collateral in other markets.

While bad debt itself cannot always be prevented, its impact is limited to a per market basis.

External Liquidators

Liquidation ensures markets remain solvent by selling collateral to repay loans before it becomes undercollateralized.

While Silo has an internal backup liquidator bot, we encourage external liquidators to plug into our own contracts. This will allow them to earn a liquidation fee while ensuring our markets remain solvent. Today there are multiple Liquidator bots on the network - working completely independantly.

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