# Risks

### Overview

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](/trading/liquidation.md).

***

### 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](/trading/liquidation.md) 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](/trading/liquidation.md) — Complete liquidation mechanics, ADL details, and API integration
* [Utilization and Interest Rates](/borrow-and-lend/utilization-and-interest-rates.md) — Rate calculation model


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