Isolation Mode

Isolation Mode is a risk management feature that allows users to supply assets as collateral while restricting their borrowing power to isolated, pre-approved markets. Unlike standard mode where collateral backs borrowing across all assets, Isolation Mode limits debt exposure to specific, lower-risk asset pairs. This protects both users and the protocol from contagion from particular high-risk collateral types during market stress.

How Isolation Mode Works

Standard borrowing mode treats your entire collateral pool as a unified backing for any supported debt asset. While flexible, this creates systemic risk: a yield-bearing stablecoin with depeg risk could indirectly back loans across unrelated markets, exposing borrowers to unexpected liquidation cascades if the stablecoin loses its peg.

Isolation Mode solves this by siloing certain collateral types from borrowing against other assets. When you supply an isolated asset, you can only borrow against it using a specific, limited set of debt assets (typically stablecoins or highly correlated pairs). This containment prevents risk spillover between unrelated markets.

When Assets Enter Isolation Mode

Assets are typically placed in Isolation Mode based on:

• 1.Low liquidity depth: Thin order books or limited DEX liquidity make large liquidations difficult
• 2.High volatility: Assets with extreme price swings that could rapidly erode collateral value
• 3.Uncertain oracle reliability: Newer assets or those with manipulable price feeds
• 4.Peg reliability: New correlated assets that are pegged to other assets like stablecoins or ETH

Step-by-Step: Using Isolation Mode

1. 1.Access the ZonaLend dashboard. Navigate to the "Supply" interface and select your desired collateral asset.
2. 2.Check isolation status. If the asset is in Isolation Mode, a badge or warning will display indicating restricted borrowing options.
3. 3.Review approved borrow markets. Click on the isolation details to see exactly which debt assets are available (typically limited to major stablecoins).
4. 4.Supply collateral as normal. Deposit your isolated asset. The UI will automatically restrict your borrowing options to the approved list.
5. 5.Borrow within isolation constraints. Select only from the pre-approved debt assets. Attempting to borrow non-approved assets will be blocked by the smart contract.
6. 6.Monitor position health. Isolation Mode uses standard health factor calculations, but with reduced LTV limits (typically 50-65% max) to account for asset volatility.