Risk Disclaimer

General Risks

Leveraged yield farming offers significant opportunities for returns but comes with inherent risks. Understanding these risks is essential for making informed decisions on Kai Finance. Users are encouraged to be vigilant and fully understand the dynamics of leveraged positions, price ranges, and liquidity conditions to maximize both security and yield.

• Smart Contract Risk: Despite rigorous security audits and best-in-class security measures, smart contracts are not immune to vulnerabilities. Any flaw in the code could potentially lead to loss of funds.

• Underlying Asset Risk: The performance of vaults is linked to the underlying assets. Changes in value or characteristics of these assets can influence returns, especially for volatile pairs.

• Operational Risk: Technical issues, including network outages, could impact access to funds or performance within the yield strategies, affecting returns or liquidity.

• Regulatory Risk: The regulatory landscape for cryptocurrencies and DeFi platforms is continuously evolving. Future changes in regulations may impact the operation of Kai Finance and its vaults.

Single Asset Vaults Risk

Extreme market events

A significant market downturn or a black swan event, such as a major stablecoin depeg, could lead to widespread liquidations. This may impact the returns and liquidity of Single Asset Vaults, particularly if the event affects multiple assets simultaneously.

In such events, Kai Finance’s liquidation mechanisms are designed to prioritize repayment to Single Asset Vault lenders, helping secure their funds first. The platform’s automated risk management tools, including proactive auto-deleveraging, add a layer of protection, though they cannot fully guarantee against losses in extreme scenarios.

Liquidty Provider Vaults Risk

Interest Rate Volatility

When demand for borrowed funds increases, interest rates rise, which can erode the profitability of leveraged positions if borrowing costs exceed yields.

Kai Finance offers real-time interest tracking, enabling borrowers to monitor costs closely and make timely decisions. Elevated rates also incentivize new deposits or loan repayments, which help stabilize utilization levels and borrowing costs.

Leverage and Liquidation Risk

Leveraged positions increase both potential gains and potential losses. When market prices move unfavorably or the collateral’s value drops, borrowers risk liquidation if the collateral value falls below the borrowed amount.

Kai Finance’s auto-deleveraging mechanism manages exposure as margin levels approach critical thresholds, aiming to reduce liquidation risk. However, sharp price drops or prolonged out-of-range periods may still result in partial or full liquidation. In volatile pairs, maximum leverage caps are set lower to mitigate these risks.

Price Range, Out-Of-Range Risk and Impermanent Loss

Leveraged LP Vaults on Kai Finance use concentrated liquidity pools, such as Uniswap V3, which require setting a price range. If the pool price moves outside this range, the position stops generating yield but continues to accrue borrowing costs. Volatile price movements may also lead to impermanent loss, impacting returns compared to holding assets directly.

Kai Finance provides tools for real-time monitoring and adjustment, allowing users to track price range status and impermanent loss. Choosing a broader price range can reduce out-of-range time, though it may result in lower yield. For highly volatile pairs, Kai enforces lower leverage caps to control risk in turbulent markets.

Extreme Market Events

During severe market downturns or black swan events, such as a stablecoin depeg, leveraged positions face rapid value declines, increasing the likelihood of full or partial liquidation for highly leveraged positions.

Kai Finance’s liquidation structure is designed to first prioritize the repayment of liquidity to Single Asset Vault lenders, which means that leveraged borrowers may bear a greater share of the impact during extreme events. Auto-deleveraging and proactive liquidation mechanisms work to minimize these losses; however, significant reductions in position value may still occur if the market remains volatile over extended periods.