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Risks

Using Silo—or any DeFi lending protocol—means you are taking explicit, non-zero risk. Even if the system is designed to isolate risk, losses can still occur within the specific market you choose.

Key point to reinforce:

  • Risk is localized, not eliminated
  • As a lender, you are effectively underwriting the borrower + collateral + oracle + liquidity conditions of that specific market

Smart Contract Risk​

Silo is built on smart contracts that manage deposits, borrowing, interest accruals, and liquidations. These contracts may contain:

  • Undiscovered bugs
  • Edge-case logic failures
  • Integration issues with external modules (hooks, liquidation modules, vaults)

Even with audits and formal verification, no smart contract is risk-free.

What this means for lenders:

  • Funds are fully on-chain and non-custodial, but also irreversible if lost
  • A critical bug could lead to:
  • Partial or total loss of deposits
  • Frozen funds (withdrawals blocked)
  • Incorrect accounting (e.g. wrong balances)

What actually matters:

  • Audits reduce risk, they do not remove it
  • New deployments / new features = higher risk surface
  • Smaller / less battle-tested markets = higher uncertainty

Collateral Risk​

Silo is permissionless: any ERC-20 token can be used as collateral.

Key risks:

  • Token contract exploits (mint bugs, admin abuse)
  • Hidden mechanics (rebasing, blacklisting, pausing)
  • Low liquidity → price collapses quickly
  • “Soft rugs” (value drains without obvious exploit)

What this means for lenders:

  • You are not just lending against collateral—you are long that collateral risk
  • If collateral value collapses: Liquidations may not cover the debt and/or you may end up with bad debt or forced collateral exposure

Oracle Risk​

Silo relies on external price feeds (e.g. Chainlink, Redstone, or hardcoded values).

Oracles are a critical dependency, and failures can be subtle.

Failure modes:

  • Price lag (slow updates in volatile markets)
  • Incorrect price (bad data, manipulation, outages)
  • Oracle downtime (no updates)

Impact on lenders:

Borrowers may appear solvent when they are not Or: Healthy positions may be liquidated incorrectly

Worst-case scenarios:

  • Underpriced collateral → bad debt
  • Overpriced collateral → delayed liquidations → losses

Liquidation Risk​

Liquidations happen when a borrower’s position becomes unsafe (debt exceeds the allowed collateral threshold).

Liquidations are:

  • Permissionless
  • Not guaranteed to happen
  • Dependent on: a- Market liquidity, b- Liquidator incentives, c-Network conditions

What can go wrong:

  • No liquidators show up (low incentive, congestion)
  • Collateral cannot be sold (illiquid markets)
  • Price moves too fast → liquidation is too late

Impact on lenders:

  • Incomplete liquidations → leftover debt
  • That leftover debt = bad debt absorbed by lenders
  • Lenders hold collateral (v3 markets only) - Read about Collateral-Debt Swap

Bad Debt Risk​

Bad debt occurs when:

  • Collateral value < borrowed amount
  • And the system fails to fully liquidate the position

What lenders experience:

  • Withdrawals partially blocked
  • Vault share value decreases
  • Permanent loss of capital in that market

Where it comes from:

  • Collateral collapse
  • Oracle failure
  • Failed or delayed liquidations
  • Extreme market conditions

Losses are isolated to that market and do not propagate across the protocol