Liquidity risk is the potential inability to enter, exit, repay, or unwind a position at a reasonable price within expected timeframes due to insufficient market liquidity.
Three Primary Risk Categories
Fixed-Maturity Borrowing
Early loan settlement through AMM swaps may result in unfavorable pricing due to slippage and price impact, or complete inability to execute, potentially forcing holders to wait until maturity.
Floating-Rate Lending
Lenders can withdraw unutilized assets, but redemptions may become dependent on borrowers repaying, creating potential withdrawal delays when utilization is high.
Liquidity Providers
Reserve rehypothecation means not all reserves may be liquid at all times, potentially causing temporary withdrawal restrictions.
Risk Scenarios
AMM liquidity depletion during volatility
Rapid withdrawal runs causing utilization spikes
Rehypothecation lockups
Correlated stress events that simultaneously impact multiple risk factors
Mitigations (With Caveats)
Fira employs liquidity incentives and rate responses, but these are not guarantees and may not work under stress. Alternative settlement pathways exist but become costly or unavailable during stress conditions.
Key Warnings
Assume liquidity can disappear rapidly
Treat fixed-maturity early exits as risky
Recognize that floating-rate withdrawals lack guaranteed timing
Avoid relying on interface estimates during market stress
