How Does Kamino Finance Work?

Single unified liquidity market with asset tiers (rather than isolated markets) enabling permissionless lending for any Solana token

Unified market offers capital efficiency and deep liquidity but introduces contagion risk — a bad asset can contaminate the entire pool. Asset tier system mitigates but does not eliminate this risk.

eMode (Elevation Mode) enables higher LTV ratios when borrowing/lending within correlated asset groups (e.g., SOL/mSOL)

Higher leverage for correlated assets improves capital efficiency but assumes correlation holds. During market stress, correlations can break, triggering liquidations across eMode positions.

Automated rebalancing vaults with auto-compounding that issue yield-bearing kTokens representing proportional pool shares

Automated vaults simplify LP management but introduce smart contract concentration risk. kToken exchange rate depends on vault performance and accurate accounting.

Dynamic interest rates with utilization-based kink points per asset, governed by Kamino Risk Council

Standard kinked curve adapted for Solana's fast block times. Risk Council can adjust parameters, introducing governance centralization risk.

Dynamic liquidation penalties and auto-deleverage mechanism that lowers deposit/borrow caps during adverse conditions

Auto-deleverage is a proactive risk management tool but can force position unwinding during volatile periods. Users may be unwound even if their individual position is healthy, due to protocol-level cap adjustments.

Advanced Oracle Risk Engine combining heuristic analysis, EWMA pricing, and multi-provider data feeds (Chainlink, Pyth, Switchboard)

Multi-oracle approach with EWMA smoothing reduces flash-crash vulnerability but introduces complexity. Oracle disagreement scenarios could cause incorrect pricing.

Tiered asset classification (isolated, cross, collateral) within unified market to contain risk from long-tail assets

Asset tiers provide granular risk controls within the unified market. Tier assignment by Risk Council introduces governance dependency and potential for miscategorization.

Kamino Risk Council manages asset risk parameters, deposit caps, and tier assignments

Centralized risk management via council enables faster response but creates a single point of governance risk. Council decisions directly impact user positions through cap adjustments.

Risk from any listed asset can spill over to the entire unified pool. A toxic or manipulated asset could create bad debt that is socialized across all lenders, unlike isolated-market designs that contain the blast radius.

eMode assumes asset correlations hold (e.g., SOL and mSOL). During de-pegging events or protocol failures affecting one asset, eMode positions become undercollateralized faster than standard positions, triggering rapid liquidation cascades.

When the auto-deleverage mechanism lowers caps during market stress, users near the cap are forced to unwind. This forced selling creates additional downward pressure, potentially triggering more cap reductions in a self-reinforcing loop.

Historical precision loss bug in kToken exchange rate calculation allowed excess collateral redemption. While patched, similar precision issues in exchange rate computation could resurface as new vault strategies are added.

Oracle disagreements between multiple providers during fast price moves could delay eMode liquidation triggers, allowing undercollateralized positions to persist longer than intended.