Risk Framework
Understanding the risks of supplying and borrowing on Avocado Fund.
What happens when a borrower defaults
Avocado Fund is an unsecured lending protocol. Borrowers do not post collateral, so when a borrower fails to repay, there is no liquidation mechanism to recover the funds. Loans unpaid after 30 days are flagged as overdue, and the admin may mark them as defaulted on-chain.
Default consequences for borrowers
- • 1 default → AVO Score drops to 0, credit limit capped at Tier 1 ($50)
- • 2 defaults → Credit limit capped at Tier 0 ($25)
- • 3+ defaults → Account locked out entirely (admin must manually re-enable)
When a default occurs, the outstanding principal remains recorded on-chain as bad debt. The vault's share price reflects the total assets minus any uncollectible debt.
How bad debt is handled
Bad debt (defaulted loans that cannot be recovered) directly reduces the total assets available to lenders in the vault. There is currently no insurance fund or protocol buffer to absorb losses.
If total bad debt exceeds the vault's reserves, lender redemptions are proportionally reduced. For example, if 5% of vault assets are defaulted and unrecoverable, each lender experiences approximately a 5% loss on their position.
The protocol mitigates this risk through:
- • Identity verification (KYC + sanctions screening) for all borrowers
- • Progressive credit limits that start small ($50) and grow only with proven repayment history
- • On-chain AVO Score tracking that captures repayment behavior transparently
- • A $5M vault cap that limits total protocol exposure during early operation
Reserves and protocol buffers
Avocado Fund does not currently maintain a dedicated insurance fund or reserve pool. The 10% performance fee collected on borrower interest is allocated to the protocol treasury for operational expenses and future development — it is not reserved for covering defaults.
Future protocol upgrades may introduce a reserve mechanism funded by a portion of the performance fee. Any such changes would be announced publicly and implemented through governance.
Historical repayment and default performance
Avocado Fund launched in May 2026. As the protocol matures, historical repayment rates and default statistics will be published on the Transparency page.
Early-stage notice
During the initial months of operation, the borrower base is small and default data may not be statistically representative. Lenders should consider Avocado Fund a high-risk, early-stage protocol and only deposit capital they can afford to lose.
Lender risks
Credit risk
Borrowers may default on their loans. Without collateral or an insurance fund, losses are borne by lenders proportionally.
Liquidity risk
Withdrawals are limited by available vault liquidity. If utilization is high (most USDC is lent out), you may need to wait for borrowers to repay before you can fully withdraw.
Regulatory risk
DeFi lending protocols operate in an evolving regulatory environment. Future regulatory actions could impact the protocol's ability to operate in certain jurisdictions.
Smart contract risks
All funds are held in smart contracts deployed on Arbitrum. While the contracts have been reviewed by Omniscia (four audit rounds, zero critical findings), no audit can guarantee the absence of bugs or vulnerabilities.
Potential smart contract risks include: undiscovered bugs, economic exploits, or vulnerabilities in dependent protocols. The vault cap of $5M limits total exposure during the early operational phase.
All contract code is open source and available for review on GitHub. Users are encouraged to verify the code before depositing funds.
Stablecoin risks
The vault accepts USDC, a centrally-issued stablecoin backed by Circle. If USDC depegs or Circle experiences operational issues, the value of vault assets would be affected proportionally.
USDC is issued by a regulated entity (Circle) and is redeemable 1:1 for USD, but it remains subject to counterparty risk. Consider diversifying across multiple stablecoins and protocols.
Liquidity and withdrawal considerations
Lenders can withdraw USDC at any time, subject to available liquidity. The vault tracks deployed (lent out) vs. idle capital. Your maximum withdrawable amount is shown in real-time on the Vault page.
What determines available liquidity?
- • Total vault assets minus total borrowed (deployed) capital
- • When utilization is 100%, withdrawals are blocked until borrowers repay
- • Track real-time utilization on the Analytics page
Lenders are advised to monitor vault utilization and plan withdrawals accordingly. During periods of high utilization, partial withdrawals may be necessary.
Risk Disclosure
Avocado Fund is an experimental DeFi protocol. Lending to unsecured borrowers carries inherent credit risk. Only deposit capital you can afford to lose. Past performance does not guarantee future results. Read the full Terms of Service before participating.