# Risk Management ### Liquidation Risks #### **Risk:** Your position is at risk of liquidation if the market value of your collateral falls, causing your Safety Buffer to deplete entirely (Debt Ratio equals the Collateral Factor). #### **Mitigation:** * Fathom utilizes improved Fixed Spread Liquidation, with batch liquidations and a gentle Close Factor. Governance decides on the Close Factor value, but even for very volatile assets, it is possible to set it to 25% of a position's Debt Value. For Gold and other less volatile assets, this value is lower. This reduces the costs for the liquidators and the risk for FXD borrowers to lose capital, at the same time preventing the risk of bad debt. * The user can mitigate the risk by increasing the Safety Buffer to protect against potential collateral price movements. It is recommended that the market be monitored and the Safety Buffer adjusted accordingly. Fathom is building AI agents to help users to understand the market conditions. * Fathom FXD is moving towards employing a dual-threshold liquidation process designed to reduce the frequency and impact of liquidations. This approach includes a 'soft' threshold where AI agents assess market conditions. If the price drop is deemed temporary with an expected quick recovery, actions like liquidation can be postponed to avoid unnecessary cascades. The 'hard' threshold represents a more critical point where liquidation occurs to preserve system stability. * You can find more details about liquidation process in [Whitepaper](/whitepaper.md). ### Price Stability #### **Risk:** Though fully backed by assets, FXD’s market price can fluctuate above or below its $1 peg temporarily due to real-time supply and demand dynamics. #### **Mitigation:** * Stability Fees can be adjusted to influence market behavior, encouraging repayment of loans with FXD during high supply phases, thus bolstering demand. * FXD includes mechanisms like a debt ceiling to regulate FXD supply in accordance with market demand. * The Stability Swap Module in Fathom ecosystem facilitates efficient arbitrage opportunities, stabilizing the FXD price around its peg. * You can find more details about stability of FXD price in [Whitepaper](/whitepaper.md). ### Undercollateralization #### **Risk:** There is a potential for FXD to become undercollateralized if the market value of the backing assets drops significantly. #### **Mitigation:** * Liquidations are supposed to occur before collateralization value drops to 100% * A conservative approach to the collateral factor limits the maximum FXD issuance per collateral unit. This factor is continuously adjusted based on asset volatility and comparative data from other lending protocols, ensuring a sufficient buffer against market downturns. * Interest accrued on loans contributes to a surplus reserve, fortifying our capacity to manage and cover bad debts effectively. * FXD is using the diverse basket of various assets, lowering the risk of total collateral value drop. ### Smart Contract Vulnerabilities #### **Risk:** Despite thorough audits, our smart contracts and those of integrated platforms might contain vulnerabilities. #### **Mitigation:** We engage multiple reputable third-party auditing firms to scrutinize our contracts, significantly mitigating potential risks. Comprehensive audit reports are accessible for transparency. The list of the audits: * * --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.fathom.fi/fxd-stablecoin/risk-management.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.