Risks

All DeFi protocols, including Velocity, come with risks, which you should understand before depositing significant amounts of crypto. Some of the main risks you take on using Velocity are outlined here.

You can find further risk parameters in Protocol Guard Rails and Risk Parameters.

Smart Contract and UI Risk

The smart contract or UI could have a bug or exploit that causes unexpected behaviour and a loss of your funds. This risk is inherent to all smart contracts and relies on the discipline of the development community, core contributors, and auditors.

Velocity is a fork of Drift Protocol v2. The existing audit reports were performed on the pre-fork codebase, not on Velocity’s own deployment or the functionality added since the fork. OtterSec’s post-fork review of Velocity’s own program has delivered a large set of High and Medium findings, and fixes for them are already in the codebase, but the final report has not been published yet. See the migration guide for what changed since the fork.

Blockchain Risk

The Solana blockchain remains under development, which creates technological, uncertainty and security risks that Velocity has no control over. The cost of transacting on Solana is variable and can increase or decrease at any time, which can affect any activity you take on Solana and may result in losses, price fluctuations, or increased costs.

Oracle Risk

Velocity relies on Pyth (via Pyth Lazer) for the price feeds that power liquidations. These oracles could report incorrect prices, which can result in you being wrongfully liquidated and losing all your funds.

Levered/Social Loss Risk

If you hold a levered position during sharp price movements, you can lose more than your collateral value. If the Insurance Fund is not sufficiently capitalised, these losses are socialised across market participants.

Liquidation Risk

Velocity offers both leveraged perpetual swaps and borrow/lend. For perpetual swaps, you risk liquidation when your margin ratio poses a stability risk to the exchange: your collateral can get liquidated when its value drops below your maintenance margin fraction.

Long/Short Imbalance Risk

Velocity’s AMM is the counterparty to all trades taken against it. This means the AMM itself has delta risk, and this risk is magnified when market conditions skew on either side and the imbalance between longs and shorts increases.

The AMM has protections in place to prevent the long/short imbalance from skewing too heavily to either side. You can read more on that at Velocity AMM. Despite these protections, the AMM can still be exposed to delta risk in periods of significant volatility.

No Off-Setting Loss Risk

The unrealised P&L you can lock in from entering and exiting a trade against the AMM is technically unbounded (for example, if BTC goes toward infinity).

While you can achieve this unrealised gain, you need an offsetting loss (or sufficient fees collected) before you can settle it in full and withdraw it as collateral.

Additionally, if the unrealised P&L imbalance exceeds its per-market threshold, the margining system may discount those unrealised gains (initial margin, not maintenance) to prevent large borrows against them. This discounting only affects new positions you open; it does not affect your liquidation threshold.

These rules are systemised, and you can read more on them in P&L and Margin.

Untimely Liquidation Risk

During large-scale liquidations or market turmoil, your positions and balances might not be liquidated in time to cover the losses taken out by a liquidated user. The shortfall (or negative balance) is treated as levered losses.

In the past, levered losses in the main pool have been filled via top-ups from the Insurance Fund. If the Insurance Fund is depleted, the resulting loss is socialized across the system.

100% Utilization Risk

When an asset is fully utilized (100% of the supply is lent out), there are no tokens left in the pool, so withdrawals and borrows fail. You have to wait until the utilization rate goes down, either through other users repaying their loans or depositing new funds, before you can withdraw or borrow.

You’re more likely to be affected by this if your deposit represents a large share of the pool, or if the asset has extremely high borrow demand.