How Spout Manages Risk
Every risk in Spout has a control in front of it, and every loss has a fixed order of who absorbs it. This page maps them; the rest of the section goes into each.
| Risk | What could happen | Controls |
|---|---|---|
| Collateral prices fall | A loan becomes larger than its collateral can safely support | 50% maximum LTV; per asset liquidation thresholds from 54.1% to 62.5%; partial liquidation back to about 50%; penalties to the Insurance Fund |
| Bad debt | A sale after a sharp gap does not cover a loan | Insurance Fund first, then Junior, then Senior |
| A weak options cycle | Premium settles below what accrued | Strikes out of the money; covered calls only; short cycles; adjustments spread over 7 days; Spout absorbs any contract below zero |
| A run on withdrawals | Lenders all want cash at once | 85% utilization cap; 15% cash reserve; Senior haircut and queue; Junior notice |
| Bad prices | A wrong or stale price triggers or blocks actions | Signed prices; staleness checks; automatic pauses |
| Operational error | A step in a cycle or liquidation goes wrong | Every step reconciled; cycles halt for human review when anything does not match |
| Smart contract flaw | A bug in the programs | Independent audits, with reports published when complete (see Security Practices and Audits); governance controlled by a multisig; emergency shutdown that keeps repaying open |
| Issuer or broker failure | A token's backing, or the brokerage account holding the shares behind collateral, is impaired | Approved issuers only; token design checks; receipt tokens matched to shares held; continuous reconciliation; assets can be paused |
No control removes risk entirely. Risks for Borrowers and Risks for Lenders describe what remains.