In the case of Bad Debt (negative lenders’ equity because of extreme fall of collateral 's value), will the loss be divided evenly pro-rata among lenders or only those who withdraw too late will absorb the loss?
Flux is based on Compound V2 code. In case of bad debt, the latter scenario would happen.
While bad debt can theoretically happen, bad debt accrual on Flux would mean that nobody wants to liquidate and seize OUSG at a discount. Given OUSG is backed by the SHV ETF, we consider that not seeing an arbitrage trader taking the opportunity for a 5% discount on those as very unlikely.