All methodology pages

Price feeds and oracle risk

How the price used by a lending market affects the timing and outcome of liquidation.

What the price feed controls

A lending market uses a price feed to compare collateral value with borrower debt. The feed may combine several sources, conversions, or switching rules. The assessment records the full route and the assets being compared.

The model keeps two prices:

  • the collateral's economic value; and
  • the value observed by the lending protocol.

When they move together, liquidation starts at the intended threshold. A stale price can delay liquidation while the collateral continues to fall.

When the protocol sees the fall late

  1. Economic value What the collateral is actually worth at any moment.
    The protocol never sees this value directly. It reads a price feed.
  2. Observed price The value the lending protocol reads from its price feed.
    A stale or failed feed keeps reporting the old price after the real value has fallen.
  3. Feed delay The time between the real fall and the moment the protocol can see it.
    Liquidation cannot start until the feed catches up, and the collateral keeps falling meanwhile.
  4. Extra shortfall Liquidation starts late and recovers less. The value lost during the delay adds to bad debt.
The model keeps the collateral's economic value and the price the protocol observes as two series. When the feed lags, liquidation starts late, the collateral is worth less by the time it is seized, and the extra shortfall adds to bad debt.

Normal operation and failure

Some feeds switch between a primary and backup source when prices diverge. The normal delay created by that rule is part of the feed design. A failure event covers cases where the route stops performing its intended function.

Each route carries a failure probability, the likely correction time, the share of failures that delay liquidation, and the expected execution quality after correction. These values come from route-specific evidence or a named policy prior.

From feed risk to vault loss

Price-feed risk affects when liquidation can happen. Asset recovery determines what the seized collateral is worth. The model joins these two parts for each market.

A short feed delay can have little effect when collateral is liquid and borrowers have strong safety margins. The same delay can matter more for a leveraged position backed by an asset with limited recovery.

Continue with Portfolio loss model.