Liquidity risk is the possibility that you can't exit, withdraw, or unwind your position at a reasonable price — or at all — within the timeframe you expect. It affects all three user types on Fira: borrowers, lenders, and liquidity providers.

Borrowers in fixed-rate markets

Settling a fixed-rate loan early requires swapping on the AMM. If AMM liquidity is thin (common during volatility), you may face significant slippage — the effective cost to close out early could be much higher than expected. In extreme cases, there may not be enough liquidity to execute the trade at any reasonable price, and you'd have to wait until maturity.

Lenders in variable-rate markets

Lenders can only withdraw assets that are not currently borrowed. When utilization is high — meaning most of the pool is lent out — your withdrawal has to wait for borrowers to repay. There's no guaranteed timeline for this. Rapid withdrawal runs by other lenders can further spike utilization, creating a feedback loop that delays everyone's redemptions.

Liquidity providers (LPs)

Fira's design allows part of LP reserves to be rehypothecated — deployed to earn additional yield. That means not all LP funds are liquid at all times. If a large number of LPs want to withdraw simultaneously, partial rehypothecation can cause temporary withdrawal restrictions until the deployed reserves are recalled.

These mechanisms help under normal conditions. Under stress — which is precisely when you most want to exit — they may not be sufficient.