This page outlines the key risks for participants in Backpack's borrow/lend system. For detailed mechanics of how liquidations and ADL work, see Liquidation.
Lender Risks
Asset Substitution Risk (ADL)
In rare, extreme scenarios, you may receive USD value instead of your original token.
Normal case: Borrower is liquidated → your original token is returned to the pool.
ADL case: Standard liquidation fails → you receive USD equivalent.
This only happens when:
Prices move faster than liquidation can execute
Insufficient liquidity to repurchase the borrowed asset
Backstop Liquidity Providers cannot absorb the position
Example:
You lend 1 BTC. Borrower defaults during extreme volatility.
Normal: You get 1 BTC back.
ADL: You get $100,000 USDC (BTC value at time of ADL).
You receive full value—just potentially in a different asset.
Price Display Note: ADL transactions are executed off-book (outside the public orderbook). As a result, these execution prices are not reflected in K-line charts.
Redemption Risk (High Utilization)
When pool utilization is high, you may not be able to redeem immediately.
Utilization
Redemption
< throttled utilization
Instant
> throttled utilization
May be delayed
100%
Blocked until borrowers repay or are liquidated
Mitigation: Monitor utilization and redeem before anticipated high-demand periods. High utilization also means high interest rates, which incentivizes repayment.
Interest Rate Volatility
Interest rates adjust dynamically based on utilization. During high-demand periods, rates can spike significantly. While this benefits lenders, rapid rate changes can affect expected returns.
Borrower Risks
Liquidation Risk
If your collateral value falls relative to your borrow, you face liquidation. See Liquidation for complete mechanics.
Key points:
Liquidation triggers when MMR reaches 100%
1% liquidation fee applies
Partial liquidation reduces position to restore margin health
Forced Loan Closure (ADL)
Your loan may be forcibly closed if:
A lender using their lent assets as collateral faces liquidation
Pool is at 100% utilization, blocking their redemption
ADL activates to free up liquidity
Impact:
Your loan is closed without notice
Your collateral composition may change
Your total account value remains unchanged
This is not a loss—only your loan structure changes.
Interest Accrual
Interest accrues continuously and compounds. During high utilization periods, rates can spike significantly. Monitor your borrow cost and maintain sufficient collateral buffer.
Risk Mitigation
For Lenders
Risk
Mitigation
Asset substitution
Accept that ADL may return USD in extreme cases
Redemption delays
Monitor utilization; redeem before peaks
Rate volatility
Understand rates are dynamic
For Borrowers
Risk
Mitigation
Liquidation
Maintain margin buffer well above MMR
Forced closure
Understand ADL may close your loan
Interest spikes
Monitor rates; repay during high utilization
Further Reading
Liquidation — Complete liquidation mechanics, ADL details, and API integration
