Description

Liquidations in the protocol affect the underlying AMM, which may cause more liquidations. This is a cascading effect. To counteract this, the worth of user collateral is calculated conservatively (the swap price is calculated as if one liquidation would set off all the liquidations). This works, however it devalues the user collateral, and this effect becomes worse as the market grows relative to the underlying pool.

Impact

Users risk more collateral for smaller loans and may be able to borrow less than expected.

Recommendations

Re-architect the conservative value calculations to only account for positions that a liquidation would actually put at risk.

Remediation

The Nukem team has acknowledged this issue and will put it as an object in their road map once markets start becoming large relative to their underlying pools.