When utilizing Metronome Synth and Smart Farming, users must understand the underlying risks of each asset on the application. Synthetic assets are generated by the user against deposit asset(s) as a Collateralzed Outstanding Position (COP). Both Collateral and Synthetic assets may be subject to market volatility. If the value suddenly drops due to market conditions, a portion could be liquidated to repay any synths generated and keep the position healthy and collateralized. Although we ensure a multitude of security audits, Smart Farming and participating in DeFi protocols comes with inherent risks.
Collateral and synthetic assets alike require oracles for Metronome to value the assets accordingly. There are several risks associated with oracles that should be considered:
Manipulation: If an attacker can manipulate the oracle price feed, they can mint synthetic assets without proper collateralization, enabling them to perform an attack against the DEX markets that support synthetic asset liquidity.
Failure: If price updates are not provided for an extended duration, the proper functioning of Metronome Synth might be compromised. This could potentially lead to challenges with liquidations and inaccuracies in the calculation of collateralization ratios.
Delay: In rapidly changing markets, there may be instances where oracles experience a delay in updating prices. This can impact the valuation of synthetic assets and the collateralization ratio of users' positions. Consequently, this might influence liquidation decisions, potentially resulting in unintended liquidations or the continuation of undercollateralized positions. This could also cause users to see slight inaccuracies on prices set in the Synth Marketplace when trading synthetic assets internally.
Price volatility can harm the collateral position, which is responsible for covering liabilities and ensuring the solvency of the protocol. If the value of the collateral falls below the amount outstanding, it poses a significant risk that the collateral can be liquidated by increasing the required Liquidation Point. Additionally, price volatility also affects the liquidation process, as the liquidator's margin must be sufficient to enable profit.
DEX Liquidity & Pricing
Users may be unable to complete the looping position at competitive rates if the integrated DEX does not have sufficient liquidity due to high asset/pool utilization. Additionally, users may realize losses entering and exiting the Synthetic assets on the open market (through Smart Farming or otherwise) if they execute trades at unfavorable rates. Synthetic assets are “soft-pegged” to the underlying assets and expected to deviate up-and-down from the peg in the short term.
As positions are over-collateralized, you must maintain an acceptable health basis when utilizing Metronome Synth. Your health factor can be found in the dApp under the pool position. Note that any type of additional mintage, whether direct or via Smart Farming, will lower your Health Factor and increase probability of liquidation.
The health factor of a user's outstanding position is a significant metric that determines whether their position is at risk of being liquidated. The process of calculating the health factor involves determining the maximum amount of outstanding assets a user can issue, known as the issuable limit. This limit is calculated by multiplying the deposit value denominated in the underlying token by the collateral factor of the deposit token, which represents the percentage of the deposit value that can be used to issue outstanding assets, as determined by the protocol governance.
To determine the deposit value in USD, the total value of collateral deposited by the user is converted to USD using the price from the master oracle. If a user's outstanding position is less than or equal to their issuable limit, their health factor is considered healthy. However, if their outstanding amount exceeds their issuable limit, their health factor falls below the healthy threshold, and their position is at risk of being liquidated.