8.2 Liquidity Risk and Slippage Design

Parax introduces a novel asset class whose liquidity profile is heterogeneous and, in many cases, non-linear. Unlike digital-native tokens, tokenized physical assets often face thin order books, asymmetric demand curves, and longer time horizons for exit. These conditions necessitate the implementation of protocol-level mechanisms to manage price discovery, slippage, and temporal liquidity risk.

For fractional ERC-20 markets, Parax leverages bounded automated market maker (AMM) designs and time-gated redemption functions to stabilize volatility during periods of low depth. Slippage curves are dynamically calibrated based on real-time volume, historical volatility, and verified appraisals, preventing outsized price impact from abrupt trades. Additionally, liquidity providers are incentivized through risk-adjusted yield multipliers during low-liquidity epochs, counterbalancing asymmetries in supply and demand.

For whole-asset transfers, especially via OTC or auction routes, the protocol enforces time-based settlement guards and reserve requirements. These mechanisms allow counterparty bidding windows to extend in response to elevated demand, allowing endogenous price correction rather than premature clearing at suboptimal valuations.

Risk from prolonged illiquidity is partially underwritten by Parax's backstop facility: a vault-funded reserve that purchases distressed fractional positions at floor-bounded prices determined by a moving average oracle. This facility operates as a non-custodial safety net and is governed by DAO allocation proposals, ensuring solvency without centralized intervention.