Risk Management

Risks

Market Liquidity Risk

During volatile times where liquidity might become scarce, Flaex might encounter some problems executing its users’ order at the exact desired price. However, because Flaex sources its liquidity from Uniswap, who is a battle-tested-veteran, it is unlikely that liquidity on major pairs might disappear overnight!

If users encounter errors showing liquidity issues, try to adjust the Slippage settings for a better and smoother trading experience.

Smart Contract Risk

The on-chain Perp DEX relies heavily on the accuracy and security of the Arbitrum bridge smart contracts. Any bugs or vulnerabilities within these smart contracts could lead to the loss of user funds.

Oracle Manipulation Risk

Layers 2 might encounter some network issues that slow down the feeding of prices via Oracles. For Aave, it offers a “Grace Period” where it will not liquidate its users. However, that should not affect traders' experience since the other source of prices are sought directly on-chain from Uniswap. If both oracles fail at the same time, Flaex will also offer its traders a “grace period” where liquidation is turned off and users can opt-in to close their positions without suffering any liquidation fees.

Risk Mitigation

To mitigate risks such as oracle manipulation, especially on less liquid assets, additional measures are in place. These include open interest caps, determined by factors like liquidity, basis, and leverage within the system. When an asset reaches its open interest cap, no new positions can be opened. Additionally, orders cannot be placed further than 1% from the oracle price. However, HLP is exempt from these rules to ensure continuous liquidity quoting.

Risk Management Solution

Health Factor

The Health Factor, also known as the Margin Ratio, is an essential metric for assessing the financial health and debt status of user positions on Flaex. Given Flaex's integration with AAVE to offer users both short- and long-term debt instruments, it is crucial to manage and mitigate the risks associated with debt ratios, which could potentially lead to user defaults and subsequent liquidation on AAVE.

The Health Factor (HF) calculator plays a pivotal role in evaluating and managing these risks. The HF is determined using the following formula:

HealthFactor = totalAsset(1)/totalDebt(2)

• totalAsset(1) refer to the combined value of deposits made by Capital Providers into Flaex, as well as the assets held in Flaex's treasury. These assets are critical for maintaining liquidity to support both current and future loans that Flaex owes to its users on the AAVE platform.

• totalDebt(2)represents the current loans that Flaex has taken on, which are essentially obligations owed to users on the AAVE platform for establishing leveraged positions.

The Health Factor index can result in three scenarios:

Case 1: Health Factor = 1 This indicates that the assets borrowed by the user on AAVE are being liquidated. In this situation, Flaex must protect the interests of both its users and the platform to avoid bad debt. If there is a sudden drop in market liquidity causing the ratio of owned assets to total debt to decline, Flaex will automatically liquidate all open positions without charging users any additional liquidation fees. However, a Health Factor of 1 typically occurs only in extreme cases, such as hacks or exploits. Under normal market conditions, Flaex will actively manage and maintain the Health Factor at a level greater than 1 through various financial operations.

Case 2: Health Factor > 1 - 1.3 When the Health Factor falls within this range, both user and Flaex positions are considered at risk. To address this, Flaex will implement financial strategies to reduce the Open Interest rate, increase Capital Provision through Emergency Funds, and raise the APR for Capital Providers, among other measures.

Case 3: Health Factor ≥ 1.3 In this scenario, both user and Flaex positions are considered safe.

Emergency Fund

At Flaex, we recognize that safeguarding the rights of our users and securing the platform's long-term viability are our top priorities. To achieve this, we have structured our financial operations to include an Emergency Fund. This fund is drawn from a substantial portion of Flaex's revenue and is reserved for critical situations, such as liquidity shortages in the Capital Providing pool or unforeseen events as described in the scenarios above.