Isolated Risk with Kashi
Introducing Toshokan, a community-first blog for Sushi

Introducing Toshokan, a community-first blog for Sushi

Today we're excited to introduce Toshokan (図書館 Japanese word for library), our new blog that will help keep our community informed about the latest happenings at Sushi.

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Isolated Risk with Kashi

In the event of a drastic price movement or a hack, the pool would lose all its money, and so would you. Kashi is here to prevent that from happening with isolated markets.
Isolated Risk with Kashi

ISOLATED PAIRS = ISOLATED RISK

In light of the recent events (the huge loss of assets deposited on two “classic” lending platforms), I want to remind you about an important feature of Kashi - isolated pairs.

The collapse of LUNA had a domino effect on the assets of other protocols. It caused the assets on Blizz Finance (Avalanche) to be completely drained and Venus Protocol (BSC) suffered an $11.2 million loss. I'm not going to get into the details or try to figure out who's at fault (you can read more about the events here). What's important is that we learn from our mistakes and move forward!

DeFi protocols declare losses as attackers exploit LUNA price feed discrepancy
The protocols lost millions of dollars because of the price inaccuracy following the LUNA price drop.

But to put it simply, the crash of just one asset accepted as collateral caused a total loss of users’ funds on one platform and huge losses for the users of another. Fact.

One of the reasons why AAVE has been so successful is because they are very careful about the assets that are used as collateral. This meticulous attention to detail is what has allowed them to become the leading DeFi lending protocol. Just one example: AAVE does not accept USDT as collateral. While there are users who are willing to offer their funds as collateral against USDT (or any other asset), the fact that all users’ deposited funds are exposed to risk against any single asset makes this option unacceptable. This means that the available options for users are limited.

While risk management is essential for safeguarding your funds, it's important to remember that no system is foolproof, it does not change the fact that just one asset crash may drain all the deposited funds. it's possible that the market crash isn't due to a price crash at all but instead is caused by a problem with the oracle price feeds. Or it could be that there is a bug in the contract allowing price manipulation of one of the assets involved in the transaction.

Enter Kashi

And now we come to the beauty of the Kashi isolated pairs, as isolated pairs equal isolated risk. You have the power to choose which asset your funds will be lent against. The only price that would matter to you is the price of that asset. If you have lent your funds against ETH, then only ETH price is of importance. You couldn’t care less if LUNA is crashing down. Your funds are exposed to risk only against the price of the collateral asset in the Kashi pair you lent your funds. No need for protocol risk management and no limitations. Your choice of accepted collateral - your own risk management.  The crash of one asset will not affect users, who have not chosen to accept it as collateral - It's an isolated risk.

Kashi pairs reduce risks not only for the lenders but also for the borrowers. Here are some benefits of the latter:

  • If you're borrowing more than one asset, using isolated pairs can help to protect your collateral from liquidating. This means that you won't have to liquidate your whole user collateral if the price drops - you'll only lose against that particular asset. On the “classic” lending platforms your funds are used as collateral against all your borrowing positions. So if you have borrowed USDC and ETH against your MAKER and the price of MAKER dips only against the USDC, all your MAKER will be used to cover your USDC debt and this easily can result in under collateralized ETH position and thus resulting in full liquidation. With the Kashi isolated pairs, this risk is non-existent. Each borrowed position is collateralized separately, being liquidated on one position can not lead to liquidation of the rest - isolated risk.
  • On the “classic” lending platforms, users who are borrowing the same asset will face the same interest rate, regardless of what type of collateral they're using. That’s why we see sudden spikes in the interest rates, especially for stable coins, as these are what are mostly borrowed. If you have a position that's close to its borrowing limit, then even a small increase in the interest rate can cause it to be liquidated. With Kashi isolated pairs, the interest rate of a given pair depends only on the utilization of that pair. If you have borrowed USDC against your BTC, you don’t care how many people (and in what amounts) are borrowing USDC against their ETH. The change of the interest rate in the USDC/ETH pair will not affect the interest rate of the USDC/BTC pair - isolated risk.

To learn more about Kashi and its unique features, such as elastic interest rates and the option to short/long a given asset, please visit this blog article which has in-depth information about these topics.

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