*️Risks & Insurance Fund

There are a variety of risks that are associated with using lending protocols on DeFi. Here we summarize the associated risks and how it is mitigated through careful protocol design:

Risk	Mitigations
Smart contract vulnerabilities or hack risk.	PsyLend mitigates this risk by using auditing firms to review its protocol code. PsyLend has been audited by Kudelski Security as of Jan 2023.
Market manipulations or oracle attacks	Values of collateral may be artificially increased/decreased to create bad debt on the platform. PsyLend prevents this by only using major blue chip assets in its main pool. These assets have high liquidity and a large number of Pyth oracle data providers (15+). Manipulating these assets, such as SOL, ETH, and BTC, would require extremely large amounts of capital, making it economically unfavorable to exploit PsyLend.
100% Utilization Rate	When a specific lending market reaches utilization of near 100%, users may not be able to withdraw the full amount they are requesting. In this situation, users will have to wait until more assets are supplied or repaid to bring the pool utilization down before withdrawing. PsyLend will mitigate liquidity issues by supply provision or repay bad debt via the insurance fund.
Risk Engine Failure	When supplied assets are not liquidated quickly enough to pay off loans, bad debt may be created. Bad debt refers to a situation where the amount of loan owed by a user exceeds value of their collateral provided. PsyLend prevents this by using only major blue chip and blue chip linked assets such as BTC, SOL and SOL-Covered Calls which are subjected to less extreme price volatility, in the main lending pool. DOVs supported sell far out-of-the-money options, that has a 10% or less probability of being exercised, providing a relatively predictable token valuation. Maximum LTV and liquidation bonuses are carefully selected to ensure sufficient buffer in the event of price volatility. User and market supply limits prevent concentration in a single asset, and avoid a situation of cascading liquidations due to limited on-chain liquidity for a token. PsyLend is also working with a group of option market makers that will participate as primary liquidators for the protocol, particularly for DOV tokens.

Insurance Fund

PsyLend has seeded a protocol insurance fund with an initial sum of 100k USDC, that will serve as a backstop against the various risk factors listed above. 50% of protocol fees generated will be redirected back into the insurance fund to support protocol safety.