Risks

Potential Risks to Position Owners
Liquidation
​⚠
 Risk:
 You run the risk of being liquidated if the price of your collateral drops and your Safety Buffer reaches 0 (Debt Ratio = Collateral Factor). 
​ℹ
 Mitigation: 
AUSD's uses gentle liquidation. This limits the max liquidation size to the Close Factor, which is currently set to 25% of a position's Debt Value. This reduces the associated costs and liquidation risk for AUSD borrowers, while still preventing the risk of bad debt.
You can mitigate this risk by ensuring your Safety Buffer remains high enough to account for your collateral asset's potential price movements when borrowing AUSD. One way to mitigate the volatility of your collateral is to collateralize stablecoins such as BUSD, USDT, and TUSD which are pegged. During volatile market conditions, you should monitor your positions, and add more collateral or repay your AUSD debt if the Safety Buffer drops.
AUSD price temporarily moves below/above $1
​⚠
 Risk: 
While AUSD is fully backed by crypto assets, it could temporarily be traded at lower/higher than $1 in an open market based on the supply and demand at the time.
​ℹ
 Mitigation: 
The Stable Swap Module makes it easy for arbitrageurs to earn when the price of AUSD temporarily moves from $1, creating pressure on the price to remain at the $1 peg.
We could increase the Stability Fees and hence the cost of having open AUSD positions. This would incentivize some users to buy AUSD to pay back their loans, creating buying pressure on the market.
We have provided all the necessary tools required for arbitrage for Arbitrageurs to help us maintain AUSD price peg of $1. You can learn more about arbitrageurs and how they will help maintain the price peg here. 
Our code allows for setting of the maximum supply of AUSD in the system (i.e. debt ceiling) which allows us to control the max supply to match demand in the market at any given time.
Under collateralization of AUSD: 
​⚠
 Risk: 
AUSD could become under collateralized - i.e., no longer backed by sufficient amount of assets (amount of circulating AUSD > collateral assets values)
​ℹ
 Mitigation: 
We set a conservative collateral factor, which limits the amount of AUSD that can be borrowed against a unit of collateral.  Collateral factor value is chosen based on the assets' volatility and compared against leading lending protocols. The goal is to provide enough buffer if the market takes a sharp drop in price, which could potentially cause AUSD to be undercollateralized.
We charge a borrowing interest on the borrowed AUSD. A portion of which will be used as a surplus to help manage bad debt in the case where AUSD becomes undercollateralized. Moreover, we can also redirect a portion of Alpaca Finance's LYF platform revenue to settle  AUSD's debt.
We have a robust liquidation mechanism and a strong network of liquidators, which also includes our in-house liquidation bot. The setup has a proven track record in managing bad debt risks in our Leveraged Yield Farming product. 
Smart Contract Risks
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 Risk: 
While our smart contracts have been audited by third-party firms, they could theoretically have vulnerabilities. Integrated 3rd-party platforms like the AMMs we build on can also carry smart contract risk.
​ℹ
 Mitigation: 
Having smart contracts audited by multiple professional third-party firms decreases the chance of vulnerabilities. You can find all the audit reports we've received to date here. 
We also run a bug bounty program to provide incentives for people to look for vulnerabilities in our live code as an extra layer to filter out any potential issues. More on that here.
We carefully screen any platforms we integrate with, only working with those that have been audited and shown a track record of good security.

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Outline

Potential Risks to Position Owners

Liquidation

AUSD price temporarily moves below/above $1

Under collateralization of AUSD:

Smart Contract Risks