What risks arise from tokenized BTC redeemability mismatches

Tokenized BTC redeemability mismatches occur when the liquidity or settlement timeline of a token (like stBTC in Lorenzo Protocol) differs from the underlying BTC, creating financial stability risks.

This can trigger liquidity runs if token holders redeem en masse while BTC sales lag, amplifying price volatility through automated liquidations and interconnected DeFi platforms.

## Primary Risks

- Liquidity mismatches: Tokens offer instant redeemability, but underlying BTC may face delays or illiquidity, leading to forced sales and contagion.

- Maturity transformation: Short-term token demands clash with long-term BTC staking locks, mirroring bank run dynamics in traditional finance.

- Leverage amplification: Overcollateralized positions unwind rapidly, exacerbating losses across chains if reserves prove inadequate.

## Mitigation for Protocols like Lorenzo

Designs with overcollateralization and phased redemptions help, but scale introduces opacity and cyber risks, underscoring the need for transparent reserves and stress testing. Investors face heightened volatility without full BTC backing guarantees.

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