> For the complete documentation index, see [llms.txt](https://nysa-finance.gitbook.io/nysa/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://nysa-finance.gitbook.io/nysa/architecture/risk-framework/market-risks.md).

# Market Risks

## Market Risks

Market risks arise from each market's financial exposure — the behavior of the assets within it, the dynamics between collateral and debt, and the liquidity conditions that determine whether the system can unwind positions safely. These risks are quantified through explicit probabilistic analysis and enforced on-chain through the market's risk parameters.

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### 1. Volatility Risk (Collateral vs. Loans)

#### What can go wrong

The core risk of any lending market: the value of collateral drops relative to the value of the borrowed asset, pushing positions toward insolvency. In Nysa's case, this means the tokenized assets posted as collateral (e.g., Ondo GM stocks) lose value against the borrowed assets (e.g., USDC, BNB, ETH). If the drop is fast enough, liquidations may not execute in time to keep the market solvent.

#### How we mitigate it

**LTV and Liquidation Threshold.** Every asset pair undergoes rigorous quantitative analysis — historical volatility modeling, tail-risk simulation, correlation analysis — to set LTV and Liquidation Threshold parameters that absorb expected price moves with a defined confidence interval. LTVs are split between **Stable LTVs** (collateral vs. stablecoin loans) and **Volatile LTVs** (collateral vs. volatile asset loans) for maximum precision.

**Liquidation Bonus.** Calibrated to incentivize liquidators to act quickly, even in stressed conditions. The bonus is high enough to attract participation but contained enough to avoid excessive penalty to borrowers.

**Supply and Borrow Caps.** Each asset has hard caps on total supply (collateral) and total borrows (debt), limiting the protocol's maximum exposure to any single asset and preventing concentration risk.

**Reserve Factor.** A percentage of all interest paid by borrowers is retained as a protocol reserve, building a buffer against potential bad debt over time.

**E-Mode (Efficiency Mode).** For highly correlated asset pairs (e.g., stablecoin-to-stablecoin), E-Mode allows higher LTVs with tighter liquidation thresholds — increasing capital efficiency where the volatility risk between collateral and debt is structurally low.

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### 2. Depeg Risk

#### What can go wrong

Stablecoins or pegged assets used as borrowable assets in Nysa markets can lose their peg — temporarily or permanently. A depeg event distorts collateral ratios: if a borrower's debt is denominated in a depegging stablecoin, the real value of their debt changes unpredictably, and liquidation logic built on the assumption of a $1 peg breaks down. Conversely, if collateral is a pegged asset that depegs downward, positions become undercollateralized faster than volatility models anticipate.

#### How we mitigate it

**Curated asset selection.** Not every stablecoin is listed. Borrowable assets are selected based on peg stability history, backing transparency, redemption mechanism reliability, and issuer credibility. Assets with thin or opaque reserves are excluded.

**Oracle peg monitoring.** Price feeds track the actual market price of stablecoins, not a hardcoded $1 assumption. If a stablecoin deviates beyond a defined threshold from its peg, the oracle reports the real price, and liquidation logic adjusts accordingly.

**Circuit breakers on depeg events.** Significant peg deviation triggers automatic protective measures — supply/borrow freezes on the affected asset — preventing new exposure while the situation is assessed.

**Isolation by design.** Because each Nysa market is isolated by issuer, a depeg event in one market's borrowable assets does not propagate to other markets. The blast radius is contained.

***

### 3. Insolvency & Liquidity Risk (Redemption Liquidity)

#### What can go wrong

Two related failure modes:

**Insolvency** — A market accumulates bad debt: positions that are underwater (debt exceeds collateral value) and cannot be profitably liquidated. This can happen during extreme volatility, oracle delays, or when liquidators fail to act. If bad debt exceeds the market's reserves, lenders cannot withdraw their full deposits.

**Redemption liquidity** — Even in a solvent market, lenders may be unable to withdraw if utilization is at or near 100% (all supplied assets are currently borrowed). The assets are locked in active loans and unavailable until borrowers repay or are liquidated.

#### How we mitigate it

**Interest Rate Model (IRM).** Each market uses a calibrated interest rate curve that sharply increases borrow rates as utilization rises, creating strong economic pressure for borrowers to repay and for new suppliers to enter. The curve is designed to keep utilization within a target range where redemption liquidity is always available.

**Supply Cap.** Hard caps prevent any single market from growing beyond the liquidity depth that can support orderly liquidations and withdrawals.

**Reserve Factor and bad-debt backstop.** Protocol reserves accumulate from every borrowing transaction. In addition, the $NYSA token allocation includes a dedicated Reserves pool (8% of supply) earmarked as a bad-debt backstop, transferable only upon DAO approval.

**Liquidation mechanism.** Liquidations are incentivized through the Liquidation Bonus and designed to trigger well before insolvency — the gap between Liquidation Threshold and 100% collateralization is the protocol's safety margin. Nysa monitors liquidation health in real time and can adjust parameters if liquidator participation drops.

**Counterparty isolation.** Bad debt in one market is contained to that market. Lenders in other markets are unaffected — there is no shared solvency risk across issuers.