# Liquidity Risk ## Definition 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 --- # 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.fira.money/security-and-risk/risk-framework/liquidity-risk.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.