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Understanding Risk

Using Mewler involves several types of risk. Understanding and managing these risks is essential for safe participation in the protocol.

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Types of Risk

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Liquidation Risk

What it is: Your position can be liquidated if your health score drops below 1.0. How to manage:
  • Monitor your health score regularly
  • Maintain a buffer (health score > 1.5 recommended)
  • Understand how price movements affect your position
  • Set up alerts if possible

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Smart Contract Risk

What it is: Bugs or exploits in smart contracts could result in loss of funds. How to manage:
  • Only interact with verified contracts
  • Check audit reports
  • Start with small amounts
  • Understand the code you’re interacting with

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Oracle Risk

What it is: Price oracles can fail, be delayed, or be manipulated. How to manage:
  • Understand which oracle your vault uses
  • Be aware of oracle update frequency
  • Monitor for unusual price movements
  • Diversify across different vaults

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Interest Rate Risk

What it is: Interest rates can change, affecting your borrowing costs or lending returns. How to manage:
  • Monitor rate changes
  • Understand the IRM for your vault
  • Consider fixed-rate alternatives if available
  • Factor rate volatility into your strategy

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Collateral Risk

What it is: The value of your collateral can decrease, affecting your health score. How to manage:
  • Use stable collateral when possible
  • Understand collateral volatility
  • Don’t over-leverage
  • Diversify collateral types

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Health Score Management

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Calculating Health Score

Health Score = Total Collateral Value / Total Debt Value

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Health Score Ranges

  • > 2.0: Very safe, large buffer
  • 1.5 - 2.0: Safe, good buffer
  • 1.1 - 1.5: Acceptable, monitor closely
  • 1.0 - 1.1: At risk, take action
  • < 1.0: Liquidatable

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Improving Health Score

  1. Add Collateral: Increases numerator
  2. Repay Debt: Decreases denominator
  3. Close Position: Eliminates risk entirely

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Monitoring Health Score

  • Check regularly (daily for active positions)
  • Monitor price movements of collateral and borrowed assets
  • Set up alerts if your platform supports them
  • Understand the liquidation threshold for your vault

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Position Sizing

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Conservative Approach

  • Health score > 2.0
  • Use stable collateral
  • Borrow stablecoins
  • Keep utilization low

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Moderate Approach

  • Health score 1.5 - 2.0
  • Mix of stable and volatile collateral
  • Monitor regularly
  • Have exit plan

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Aggressive Approach

  • Health score 1.1 - 1.5
  • Higher leverage
  • Requires active monitoring
  • Higher risk of liquidation

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Diversification

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Don’t Put All Eggs in One Basket

  • Spread positions across multiple vaults
  • Use different collateral types
  • Don’t over-concentrate in one asset

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Benefits of Diversification

  • Reduces impact of single asset failure
  • Spreads risk across different parameters
  • Provides more flexibility

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Best Practices

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Before Opening a Position

  1. Research the Vault
    • Check parameters (LTV, liquidation threshold)
    • Understand the IRM
    • Review oracle configuration
    • Check for audits
  2. Calculate Risks
    • What happens if collateral drops 20%?
    • What happens if borrowed asset increases 20%?
    • How does interest accrual affect health score?
  3. Set Limits
    • Maximum position size
    • Minimum health score threshold
    • Exit conditions

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While Managing a Position

  1. Monitor Regularly
    • Check health score daily
    • Monitor price movements
    • Track interest accrual
  2. Have a Plan
    • Know when to add collateral
    • Know when to repay debt
    • Know when to exit
  3. Stay Informed
    • Follow protocol updates
    • Monitor market conditions
    • Watch for oracle issues

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Emergency Actions

If your health score drops dangerously low:
  1. Immediate Actions
    • Add collateral if possible
    • Repay debt immediately
    • Close position if necessary
  2. Prevent Future Issues
    • Review what went wrong
    • Adjust risk parameters
    • Consider more conservative approach

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Risk Scenarios

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Scenario 1: Collateral Price Drops

Situation: Your collateral (e.g., ETH) drops 30% in value. Impact: Health score decreases significantly. Response: Add collateral or repay debt to restore health score.

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Scenario 2: Borrowed Asset Price Increases

Situation: The asset you borrowed increases in value. Impact: Your debt value increases, decreasing health score. Response: Repay debt or add collateral.

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Scenario 3: High Utilization

Situation: Vault utilization reaches 90%+. Impact: Borrowing rates increase significantly. Response: Consider repaying debt or moving to different vault.

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Scenario 4: Oracle Delay

Situation: Oracle price feed is delayed or stale. Impact: Health score calculations may be inaccurate. Response: Be extra cautious, consider reducing position size.

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Tools and Resources

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Monitoring Tools

  • Mewler application dashboard
  • Health score calculators
  • Price alert services
  • Portfolio trackers

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Educational Resources

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Getting Help

If you have questions about risk management or need assistance with your positions:

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Conclusion

Risk management is crucial when using Mewler. By understanding the risks, monitoring your positions, and following best practices, you can use Mewler safely and effectively. Remember:
  • Never risk more than you can afford to lose
  • Monitor your positions regularly
  • Maintain healthy buffers
  • Have an exit plan