Liquidity Risk

Liquidity risk refers to the risk that you may be unable to enter, exit, repay, or unwind a position at a reasonable price or within an expected timeframe because there is insufficient liquidity in FiRa markets or related mechanisms. Liquidity conditions can deteriorate suddenly due to market volatility, changes in user behavior, or external events, and may materially increase your costs, delay your exit, or force you into unfavorable execution. This disclosure is not exhaustive and does not eliminate the possibility of loss.

1) Description of the Risk

A. Fixed-maturity (“fixed-rate”) borrowing — AMM exit liquidity

In Fira fixed-maturity markets, a borrower may attempt to settle a loan before maturity by swapping cash (e.g., FW) for BT through an AMM. If AMM liquidity is insufficient or highly imbalanced, the borrower may be unable to obtain BT at a reasonable price (or, in extreme cases, may be unable to execute at all).

Consequences may include:

• materially worse implied rates due to slippage and price impact;

• forced delay in repayment/unwind; and/or

• the need to hold the position until maturity and settle through the primary market pathway.

B. Floating-rate lending — redemption liquidity depends on utilization

In floating-rate markets, lenders can generally withdraw the unutilized portion of supplied assets. However, if a large share of liquidity is withdrawn or borrowed, available liquidity may become fully utilized. In that scenario, redemptions may become dependent on borrowers repaying, meaning lenders may face delays or temporary inability to withdraw.

C. Liquidity providers (“Dynamic Lenders”) — reserve rehypothecation and withdrawal constraints

Fira may allocate (“rehypothecate”) a portion of pool reserves to improve capital efficiency (see Rehypothecation). As a result, not all reserves may be liquid at all times. Depending on utilization and the volume/timing of withdrawals, liquidity providers may be temporarily unable to withdraw fully while rehypothecated assets remain deployed elsewhere.

2) How This Risk Can Materialize (Illustrative Scenarios)

• AMM liquidity dries up: market volatility or position imbalances reduce swap liquidity, making early settlement expensive or impractical.

• Liquidity run in floating markets: lenders withdraw rapidly, utilization spikes, and remaining liquidity is insufficient for redemptions.

• Rehypothecation lock-up: assets allocated to external strategies or vaults cannot be recalled quickly enough to satisfy withdrawal demand.

• Correlated stress: the same conditions that reduce liquidity (volatility, de-risking, depegs, network congestion) can also increase liquidation and execution risk.

These scenarios can occur without notice and may be exacerbated by network congestion (gas), oracle disruptions, MEV, or third-party failures.

3) Mitigations (Design Intent) and Important Limitations

Fira includes mechanisms intended to reduce liquidity risk. These mitigations are not guarantees, may not work under stress, and do not prevent adverse outcomes.

Baseline liquidity incentives

Fira seeks to support baseline liquidity by configuring market and LP parameters to encourage liquidity provision over time, including exposure to fixed-maturity markets and potential benefits from floating-rate activity through Coupon Tokens. The effectiveness of these incentives depends on market conditions and participant behavior and may fail during stress.

Delay vs. loss — no guarantee

In some cases, insufficient liquidity may lead primarily to delays (e.g., waiting for AMM liquidity to return or settling at maturity via the primary market). However, delays can still be economically harmful and can increase other risks (e.g., liquidation, adverse price moves, opportunity costs). In extreme cases, liquidity constraints can contribute to losses (e.g., forced execution at unfavorable prices, inability to rebalance collateral).

Alternative early-settlement pathway (with limitations)

Certain users may be able to use wrapped mechanisms to mint BT through the primary market and manage associated CT exposure to facilitate early repayment. However, in stressed conditions:

• CT liquidity may also be thin or unavailable;

• prices may be unfavorable; and

• rehypothecation yields may be low, making this pathway costly or impractical.

Under severe liquidity constraints, settlement via the primary market at maturity may be the most reliable path, but it may still be impacted by network conditions or protocol constraints.

Endogenous rate response in floating markets (not a guarantee)

When liquidity becomes scarce, utilization tends to rise and borrowing rates may increase. Higher rates can incentivize repayments and may attract new supply, while compensating lenders via higher yield. However:

• rate spikes can be abrupt and severe;

• borrowers may be unable or unwilling to repay quickly; and

• new liquidity may not arrive in time, so illiquidity may persist longer than expected.

4) User Considerations (Non-Exhaustive)

• Assume liquidity can vanish quickly. Plan for worst-case execution and time delays.

• Fixed-maturity early exit may be costly or impossible. If you may need to unwind early, treat your position as exposed to market liquidity and slippage.

• Floating-rate withdrawals are not guaranteed at all times. Withdrawal timing depends on utilization and borrower repayments.

• Rehypothecation adds an additional liquidity layer. Liquidity providers should assume reserves may be temporarily unavailable.

• Do not rely solely on interface estimates. Displayed liquidity/rates are indicative and may not reflect execution under stress.

Reminder: This disclosure is informational only, is not exhaustive, and does not constitute advice. Fira is experimental and high-risk. You may lose all or part of your funds and may be unable to exit positions when you expect.