Risk Factors

Smart Contract Risk

The Dahlia protocol relies heavily on the security and reliability of its smart contracts, including the core lending contracts and the integrations with external protocols (e.g., Royco) and networks (e.g., Berachain). Any bugs, vulnerabilities, or exploits in these smart contracts could result in significant financial loss for users. Despite rigorous audits and testing, the possibility of unforeseen issues remains a key risk. Additionally, reliance on third-party integrations may introduce additional vulnerabilities outside Dahlia’s direct control.

L1 & L2 Network Risk

Dahlia is deployed on multiple Layer 1 (L1) and Layer 2 (L2) networks to provide users with scalability and reduced transaction costs. However, some of these networks may be less mature than established L1s like Ethereum. Risks include potential downtime, chain reorganizations, or consensus failures that could disrupt protocol functionality. Moreover, any bridge-related issues between networks may amplify these risks, potentially affecting user funds and transaction reliability.

Market Liquidity Risk

The liquidity in isolated markets on Dahlia depends on the active participation of lenders and borrowers. Markets for niche or long-tail assets may face low liquidity, resulting in difficulty for borrowers to obtain loans or for lenders to withdraw their funds. During periods of market stress, the absence of sufficient liquidity could exacerbate slippage, widen spreads, and result in unfavorable pricing for both lenders and borrowers. Additionally, isolated markets inherently carry liquidity fragmentation compared to pooled lending models.

Oracle Manipulation Risk

Dahlia depends on price oracles to provide accurate, real-time market data for collateral and loan assets. If an oracle is compromised, manipulated, or delayed, it could lead to distorted price feeds. In such cases, loans could be incorrectly liquidated or remain under-collateralized, causing financial harm to users and undermining trust in the protocol. Although Dahlia uses decentralized oracles maintained by validators, extended oracle manipulation is a critical risk to monitor.

Other Risks

• Regulatory Risk: The DeFi space operates in a rapidly evolving regulatory landscape. Legal changes or restrictions could impact Dahlia’s operations or the availability of its services in certain jurisdictions.

• User Error: DeFi platforms often involve complex interactions. Errors in setting parameters, managing collateral, or executing transactions could lead to unexpected losses.

• Systemic Risk: Issues in integrated protocols or the broader DeFi ecosystem (e.g., Royco Protocol, Berachain) could cascade into Dahlia’s functionality or liquidity availability.

Risk Mitigation

Dahlia employs a multi-faceted approach to risk mitigation, including rigorous smart contract audits, a bug bounty program, and time-locked upgrades to enhance security. The protocol leverages decentralized oracles with fallback mechanisms to ensure accurate market data, while incentivized liquidity and dynamic market parameters address market liquidity risks. By deploying on multiple, carefully selected L1 and L2 networks, Dahlia reduces dependency on any single network and ensures resilience during potential downtime. Additionally, clear documentation, user education, and transparent governance empower participants to manage risks effectively while fostering trust and ecosystem stability.