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Risks

Potential Risks to Liquidity Providers

Loss From counter exposure:

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    Risk:
    • Liquidity providers in the pool act as market makers with counter-exposure to the aggregate perp positions. While there is theoretical risk attached to this, this exposure layer can be considered to provide additional positive expected value, because such has shown to be the case historically; Market makers providing liquidity to traders have consistently profited from the aggregate counter-exposure in most markets over the long term, including perp exchanges. So the counter-exposure is an additional earning layer on top of the index-fund-like exposure. However, there is a chance that over a shorter time frame, counter exposure could produce a loss.
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    Mitigation:
    • We have multiple mechanics in place to prevent the liquidity pool from taking on a large net counter exposure. These measures include:
      • Funding rate: this is a rate either periodically earned or paid by open positions depending on long/short open interest (OI). The position type, long or short, earns if it has lower OI than the other position type. For example, if total Perp OI is net heavy on shorts (has a short skew), longs will earn from shorts during this period, and this would incentivize longs to open and shorts to close. The purpose of the Funding Rate is to keep long and short OI relatively balanced, which helps maintain a pseudo-neutral counter exposure for liquidity providers most of the time, and avoids counter exposure tilting too far in either direction, because the Funding Rate would proportionally increase to help rebalance the skew.
      • Borrowing fees which vary with utilization rate: as utilization of the ALP rises, the cost of holding leveraged positions increases, incentivizing traders to close their positions, which helps reduce the total relative exposure of the LP pool.

Timing of Asset Return:

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    Risk:
    • Delay in getting deposited asset back in case of the pool’s high level of utilization. Please note that traders can earmark the funds as long as they like and there is no fixed term for when the funds must be returned.
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    Mitigation:
    • Borrowing fees which vary with utilization rate: as utilization of the ALP rises, the cost of holding leveraged positions increases, incentivizing traders to close their positions. This helps reduce the utilization of the pool and maintain it at a healthy level, one where LPs can comfortably withdraw at any time.

Potential Risks to Traders

Liquidation:

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    Risk:
    • As with every leveraged product, there is a risk of liquidation if the market moves in the opposite direction of your trade. This risk increases with leverage level.
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    Mitigation:
    • We employ several mechanics to help our traders manage their risks.
      • Stop orders: Users can manage their risks easily with our advanced order types such as stop loss and stop profit orders, which can be set to execute before liquidation thresholds are reached.
      • High liquidation threshold: Given our Perp’s architecture, we are able to offer a very high liquidation threshold to traders (95x) without adding additional risks of bad debt to our liquidity providers. This increases the safety buffer before a liquidation can happen, thus decreasing the chance of it happening.

Smart Contract Risks

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    Risk:
    • While our smart contracts have been audited by third-party firms, they could theoretically have vulnerabilities. Integrated 3rd-party platforms like the AMMs we build on can also carry smart contract risk.
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    Mitigation:
    • Having smart contracts audited by multiple professional third-party firms decreases the chance of vulnerabilities. You can find all the audit reports we've received to date here.
    • We also run a bug bounty program to provide incentives for people to look for vulnerabilities in our live code as an extra layer to filter out any potential issues. More on that here.
    • We carefully screen any platforms we integrate with, only working with those that have been audited and shown a track record of good security.