Risk Management

Kawa places a strong emphasis on risk management to ensure the security and stability of the protocol. By prioritizing security over latency and implementing various measures, Kawa aims to provide a safe environment for cross-chain borrowing and lending. This section outlines the key aspects of Kawa's risk management strategy.

Security Over Latency

• Preventing Fraud: Higher latency allows more time to detect and address potential security breaches and fraudulent transactions before funds are transferred.

• Maintaining Consistency: While increased security measures may require additional processing time, they help ensure the consistency and accuracy of the blockchain, maintaining its integrity and trust among users.

XCM Aggregator

The XCM Aggregator is a key component of Kawa's risk management strategy. It mitigates potential risks associated with the exploits of bridges and cross-chain messaging protocols by requiring a quorum to be reached by different cross-chain messaging providers before committing any changes to the destination blockchain. As a result, the compromise of a single provider does not threaten the security of the destination chain.

Native Assets Only

Kawa exclusively supports native tokens for lending and borrowing services to further reduce cross-chain risks. By avoiding the use of bridge-wrapped assets, Kawa eliminates the possibility of exploits and discrepancies in asset valuations.

Liquidations

Kawa employs a liquidation mechanism that incentivizes user engagement, with the liquidation incentive steadily increasing over time. This allows the discount to rise as a function of how underwater a position is, and market forces dictate how high it needs to be. Kawa's stabilization pools provide sitting liquidity for liquidations, but the process remains open to any entities, ensuring multiple ways to maintain solvency.

Interest Rate Model

Kawa utilizes both variable and fixed interest rate models, similar to Aave. The reserve factor depends on the analysis of each asset's risk. Kawa also has an optimal utilization variable and two different slope variables depending on whether the utilization is above or below the optimal level. This controls cross-chain flows of liquidity effectively.

By implementing these risk management strategies, Kawa aims to offer a secure and stable cross-chain borrowing and lending protocol that instills confidence in its users.