Liquidity Risk

Definition

Liquidity risk refers to the potential difficulty in quickly converting assets into cash at a reasonable price, particularly in the case of illiquid or hard-to-sell assets. This risk arises when there is an inability to meet investor redemption requests promptly without significant financial loss.

Impact on Eclipse AI's Collateral

For Eclipse AI, liquidity risk directly impacts the ability to meet redemption requests from USD0 holders, who are entitled to exchange their stablecoins for $1 of collateral per coin. The collateral in question comprises various Real World Assets (RWA) that holders can select for redemption. Since these assets are not locked or staked in other protocols, they should, in theory, be readily available for liquidation. However, complications may arise if a particular RWA becomes less liquid or harder to sell—Eclipse AI might need to liquidate these assets on the secondary market or redeem them directly, necessitating a reliable mechanism to handle such transactions swiftly and efficiently.

Risk Monitoring and Management

First Line of Mitigation:

• Initial Selection Criteria: Only include RWAs that inherently possess high liquidity and can be redeemed or sold with minimal slippage within a maximum of 5 days. This ensures that all assets backing the USD0 can be quickly converted into cash.

Second Line of Mitigation:

• Liquidity Diversification: Diversify the portfolio across various types of RWAs to mitigate risks associated with specific asset classes or markets becoming illiquid.

Third Line of Mitigation:

• Continuous Liquidity Monitoring: Implement regular monitoring of the liquidity status of all assets in the portfolio, adjusting asset holdings as necessary based on evolving market conditions.