02 Aug 2023 by rate3

Here is a brief technical review of the new DeFi lending protocol [Del]v2, with a focus on the underlying possible risks or protocol breach and improper functioning in adverse crypto markets conditions or under the hacker attack:

Strengths:

- [Del]v2 uses the yield from the underlying token to secure lending, which can be more attractive to lenders than using the underlying token's market value. This is because yield is a more stable source of income, and it can also grow over time.
- Unlike traditional DeFi lending protocols like Aave, [Del]v2 doesn't have a hard liquidation mechanism. This means that the borrower's collateral is not at risk of being forcibly sold in case of adverse market conditions or undercollateralization. This feature might be attractive to borrowers who want to avoid sudden liquidation risks.
- Lenders in the [Del]v2 protocol might enjoy higher Annual Percentage Yields (APY) when the price of the underlying token remains stable or experiences bullish trends. The continuous harvesting of yield into a stablecoin can contribute to higher returns for lenders.
- [Del]v2 continuously harvests the yield into a stablecoin, which eliminates the risk of impermanent loss for lenders. Impermanent loss is a loss that can occur when you provide liquidity to a liquidity pool, and the prices of the two tokens in the pool change relative to each other.
- [Del]v2 assumes ERC-4626 style vaults, in which the yield and underlying are the same token. This makes it easier for lenders to track their yield and for borrowers to repay their loans.

Weaknesses:

- [Del]v2 is a new protocol, so it has not been battle-tested as much as some of the more established DeFi lending protocols. This means that there is a risk of bugs or vulnerabilities in the protocol.
- [Del]v2 is a complex protocol, so it may be more difficult to use than some of the more user-friendly DeFi lending protocols.
- The lender has no means to hard liquidate the borrower's assets, even if the LTV becomes unfavorable or the loan becomes undercollateralized. This means that the borrower is at risk of defaulting on the loan, which could lead to the loss of their collateral.
- A tradeoff for borrowers in this protocol is that the maximum Loan-to-Value (LTV) ratio at the time of entry is lower compared to traditional DeFi lending protocols. This means borrowers might need to provide more collateral upfront, potentially limiting their borrowing capacity.
- Lenders in [Del]v2 face a significant risk because they have no recourse if the price of the underlying token experiences a prolonged bearish trend. This lack of recourse could lead to losses for lenders in case of a significant and prolonged decline in the token's value.
- Dependency on Underlying Token's Yield: The protocol's stability and overall performance are highly dependent on the yield generated by the underlying token. If the yield decreases or becomes unstable, it might affect the stability of the protocol, impacting both borrowers and lenders.
- Assumption of erc-4626 Style Vaults: [Del]v2 assumes the use of erc-4626 style vaults where the yield and underlying tokens are the same. This assumption might limit the flexibility and adoption of the protocol, especially if certain tokens or projects do not align with this particular structure.
- Inherent Smart Contract Risks: As with any DeFi protocol, [Del]v2 is susceptible to smart contract vulnerabilities and potential security risks. Proper code auditing and rigorous testing are essential to minimize these risks.
- Market Volatility Impact: The protocol's performance could be affected by adverse market conditions, especially in situations of extreme volatility. In such cases, the yield generated might not be sufficient to cover lender's returns or borrower's obligations.

Risks in adverse crypto markets conditions or under hacker attack:

- If the price of the underlying token falls sharply, the borrower may not be able to repay the loan, even if they continue to receive yield. This could lead to the loss of their collateral.
- If the protocol is hacked, the borrower's collateral could be stolen
- If the protocol is not properly maintained, it could become vulnerable to hacks or other security breaches.

Overall, [Del]v2 is a promising new DeFi lending protocol with some potential advantages over traditional DeFi lending protocols. However, it is important to be aware of the risks associated with using a new protocol before you start using it.

Here are some additional risks associated with [Del]v2

- The protocol is still under development, so there is a risk of changes to the protocol that could impact borrowers or lenders.
- The protocol is not yet widely used, so there is a risk of illiquidity if you want to borrow or lend tokens.
It is important to do your own research before using [Del]v2 or any other DeFi lending protocol.