Risk envelope

The risk envelope is the combined boundary inside which a looped LRT position can be reviewed. It is wider than a collateral price model because recursive leverage amplifies every weakness in the collateral, borrow asset, liquidation path, AVS exposure, and insurance capacity.

This page defines the risk envelope vocabulary. It does not publish market limits, current caps, or oracle code.

Envelope surfaces

The envelope combines price risk, liquidity risk, oracle or reference-price risk, AVS slashing exposure, operator concentration, vault or middleware timing, insurance capacity, and payout uncertainty. It ties directly to LTV adjustments, Liquidity and oracles, Observable inputs, Exposure taxonomy, Slashability and timing, Backing and redemption, Capacity and policy, and Payout waterfall.

Price and liquidity

Looped positions should be reviewed against stressed price and liquidity together. A mild price move can become severe if unwind liquidity is thin, and deep secondary liquidity can still be unreliable when the primary redemption path is slow or slashable during exit. Narrow venue depth should lower borrow caps and loop-depth caps. Slow redemption should widen health buffers and compress LTV posture. Correlated borrow assets and reused liquidity venues should be treated as shared stress surfaces, not independent exits.

Oracle and reference price

Oracle risk is not only stale price. The reference unit can be wrong for the position. LRT collateral can involve wrapper exchange rates, share accounting, queued claims, vault shares, or settlement states that do not behave like a spot token during stress. A review should compare the priced unit, pledged unit, unwind unit, and current exchange-rate or NAV evidence. If those units diverge, the risk envelope should compress until the reference price maps to the actual liquidation and redemption path.

AVS, operator, and vault exposure

The AVS-risk methodology owns the exposure labels. Looping consumes those labels as policy inputs:

Direct AVS exposure can impair collateral while the borrow remains outstanding. Correlated operator exposure can make several LRTs or vault routes share the same operational fault domain. Operator-set or network changes can make a previously acceptable loop depth stale after allocation or opt-in changes. Vault epochs and withdrawal windows can leave pending exits slashable while liquidity is already needed. Veto and safety-delay windows can delay finality after a slash condition is known.

Insurance and payout uncertainty

Insurance capacity should be treated as part of the envelope only when it maps to the same slash surface the loop repeats. Generic capacity does not offset a specific operator-set, vault, withdrawal, or AVS exposure unless the policy record says so. If a future claim is delayed by evidence review, veto timing, settlement, reserve accounting, or payout ordering, it cannot be counted as immediate liquidation liquidity.

Envelope output

The output should be a documented posture: reviewable when inputs are mapped and current enough for ordinary parameter review; conservative when inputs are observable but require lower caps, lower depth, or wider buffers; compressed when one or more surfaces are weak enough that recursive use should be materially reduced; and no-loop when the position should not add recursive exposure until a blocking input is resolved.

The policy states are defined in Loop policy.