> For the complete documentation index, see [llms.txt](https://docs.looputo.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.looputo.xyz/mechanism/risk-and-mitigations.md).

# Risks & Mitigations

The potential risks of using Looputo, and the mechanisms that mitigate them.

This section outlines the primary risks of using the Looputo Protocol, the mechanisms that mitigate them, and the ongoing work to strengthen protocol resilience.

#### Liquidity Risk <a href="#liquidity-risk" id="liquidity-risk"></a>

* **Description:** Every trade Looputo makes (opening, unwinding, and rebalancing) executes through market liquidity and pays slippage. If a pool grows beyond what the market can absorb, an unwind or rebalance would move the price against itself and execute with high slippage; the same slippage is also paid on each individual entry and exit.
* **Mitigations:**
  * Each market has a **capacity limit**. Pools are sized against available liquidity so that a full unwind or rebalance can always execute smoothly, rather than being left open-ended.
  * If executing a required trade at once would incur excessive slippage, it is split into smaller trades executed in sequence, reducing the total slippage cost.
  * Capacity is set against stressed conditions rather than calm ones, since liquidity is thinnest exactly when a rebalance is most likely to be needed.
  * Because every entry and exit pays slippage, frequent entries and exits erode returns. The strategy is designed to be held over time rather than traded.
  * Capacity is a protocol parameter and is reviewed as market conditions and liquidity change.

#### Smart Contract Risk <a href="#smart-contract-risk" id="smart-contract-risk"></a>

* **Description:** Vulnerabilities in the smart contracts of the Looputo protocol, or of the protocols it integrates with.
* **Mitigations:**
  * All Looputo Protocol smart contracts are audited by independent security firms. Audits are published [here](/technical/audits.md).
  * Looputo builds only on battle-tested lending markets and integrates with protocols with established security practices.
  * Looputo uses internal and third-party tooling to monitor its smart contracts continuously and to respond automatically to critical incidents.

#### Operational Security Risk <a href="#operational-security-risk" id="operational-security-risk"></a>

* **Description:** Certain protocol functions, such as parameter updates and emergency controls, are held by permissioned roles. As with any privileged access, these roles carry a degree of operational risk.
* **Mitigations:**
  * All admin functions are controlled by a 3-of-5 multisig.
  * Contract upgrades are controlled by a timelock with a 48-hour delay.
  * The keeper that triggers rebalances and unwinds acts only on published on-chain conditions, so its behavior is reproducible and verifiable by any outside observer, and it cannot move funds to arbitrary destinations.
  * All multisig and timelock configurations are published in [Roles & Permissions](/technical/roles-and-permissions.md).

#### Underlying Collateral & Protocol Risk <a href="#collateral-risk" id="collateral-risk"></a>

* **Description:** Distress in the collateral asset or its issuing protocol, such as a depeg, a slashing event, a redemption failure, or insolvency, which typically shows up as a fall in the collateral's price. Under leverage, a price fall pushes a position toward liquidation.
* **Mitigations:**
  * **Liquidation Protection** monitors the collateral price continuously and reduces leverage as the price falls, keeping positions clear of the liquidation threshold, then restores target leverage once the price recovers. This is the primary defense against a price crash or depeg.
  * Looputo integrates only with established collateral assets and lending markets with a demonstrated record of solvency and transparency.
  * Deleveraging is targeted, so the cost of protecting the pool falls on the highest-leverage positions rather than on conservative ones.
  * Underlying collateral and protocol risks are described further in each asset's own documentation.

#### Negative Carry Risk <a href="#negative-carry-risk" id="negative-carry-risk"></a>

* **Description:** Risk of loss from negative carry. Carry is the collateral's yield minus the borrow rate, and it can turn negative from either side: the borrow rate rising, or the collateral's yield falling because the underlying protocol's strategy underperforms. Once carry is negative, a leveraged position loses money even with no price movement.
* **Mitigations:**
  * **Negative Carry Protection** monitors carry continuously and runs a cost-aware model that unwinds a position under sustained negative carry, then re-levers once carry turns positive again. Because it acts on carry itself, it responds whether the shortfall comes from a rising borrow rate or a falling collateral yield.
  * The model holds through short-lived swings and acts only when the expected loss from negative carry outweighs the cost of acting, so positions are protected without overtrading and eroding returns through gas and execution costs.
  * Both protection systems run at the pool level and on-chain, so protection is continuous and requires no action from users.