BlockScience has prepared a _risk report_ for THORChain highlighting possible risks to consider regarding the ThorFi lending program. Before diving in, it is important to note the following:

1. This report, while providing an overview of the risk landscape of the lending program, is also intended to help steer simulation-based modeling approaches to stress test risks.
2. This report assumes that the associated THORChain protocol code does not have bugs which would cause the equations and mechanisms described here to act differently than documentation would suggest.
3. This report outlines the risk landscape of the program, and attempts to be comprehensive in its highlighting of risks present, but **does not**
- pass any opinion on whether identified risks outweigh their potential benefits;
- assess the likelihood of outcomes that are associated with particular risks or failure states.
5. Without the development of a simulation and testing framework, it is difficult to determine the extent to which mitigating factors that are a part of the lending program's protocol, such as slip fees, might attenuate risks (a qualitative overview of identified mitigations is nevertheless provided in the section on [Mitigations](/vwcbqcr5Roa9WBxdw9T0Uw)). It is possible that after simulation modeling, the current mitigations are found to sufficiently address many or all of the risks (just as it is possible that there may exist scenarios where mitigations are insufficient). Understanding and assessing these possibilities is to be regarded as one of the strengths of simulation-based risk assessment, and so this report should be taken _in tandem_ with planned simulations, as mentioned in #1 above.

This report is divided into the following sections:

1. **[THORChain Lending Program Summary](/gQQbFIkiQy2WiHgo4cbU9A)**: A brief overview of the lending program is given, including its overall goals, general use case, and expected operation.
1. **[Loans as Synthetic Derivatives](/gedrnocFRxOWWgT8TXJ-sw)**: A primer is presented showing how and why the lending program is formally akin to ThorFi selling call options. A mathematical derivation is provided that describes the option's payoff profile, and sheds light on how the lending program bears optionality risk.
2. **[Failure States](/FpdB2Ap2Sdm2g5eX2VNrSg)**: A set of failure states in the system that are to be avoided is described. The references to failure states are denoted by [F#] for failure state #1, #2, #3... etc.
3. **[Risks](/TjH7cuoNQTy6I91wpgP1Dw)**: A list of risks identified for the loan program is given, denoted by [R#] for risk #1, #2, #3... etc.
5. **[Mitigations](/vwcbqcr5Roa9WBxdw9T0Uw)**: A list of mitigation mechanisms currently implemented in the lending program is given, that help manage Risks and prevent Failure states.
5. **[Analysis of Largest Risks](/VUpgsipuRcOVaf66lX833w)**: Further analysis of the largest risks is provided.
6. **[Parameter Recommendations](/-90aIiaYR1agDP1e0KCZag)**: Suggested initial parameter ranges are presented that are based upon analytical characterizations of the lending program. (Please note, however, that parameter ranges will in most cases be better informed once simulation-based scenario testing can be conducted.)
7. **[Simulation Research](/R_ksPSG0T6mtjsEE7U9q-w)**: A summary of the simulations and research into the system dynamics
8. **[Conclusion](/x1UimaQoQUOdVgDoUaEWJA)**: A brief summary of key risks, and an overview of possible risk management solutions and important questions to address.
9. **[Appendix](/WjX7Is8HTWmSuH059p5-zw)**: Extra proofs, visualizations, etc.

_First Version:_ June 12, 2023