πŸ”­Overview

A focus on security and control for CEX-based Synths.

"Collateral Custody" refers to assets that mint Synths that leverage centralized exchange trading strategies. Otherwise, all collateral is custodied via the protocol's smart contracts.

For Synths that leverage centralized exchange-based trading strategies, Umoja uses the underlying Synth collateral to establish end-user positions.

Starting in V3, instead of depositing this collateral directly on exchanges, Umoja uses "Off-Exchange Settlement" or OES providers for custody and managing asset movements to/from exchanges without actual transfers.

These providers facilitate regular settlements of profits and losses from Umoja's derivative positions, reducing the risk of liabilities during exchange failures. Importantly, using OES does not give these providers or exchanges ownership of the assets. If an exchange fails, Umoja can move funds to another exchange to continue its hedging activities.

Off-Exchange Settlement providers such as Copper, Ceffu, and Fireblocks have long been used by institutional participants in the space to ameliorate this exact risk.

Transparency

Umoja strongly believes in users' ability to independently verify the existence and control of the protocol collateral as well as the hedging derivatives positions. All of our Off-Exchange Settlement providers enable us to provide on-chain wallet addresses as so users can validate the existence of the protocol collateral.

Approach to Decentralization

Umoja adopts a "progressive decentralization" strategy, balancing centralized and decentralized sources of liquidity to optimize Synth functionality based on each Synth's goals. This approach acknowledges the trade-offs between relying on highly decentralized solutions versus their centralized counterparts.

As a pioneer in making asset management strategies composable, Umoja's infrastructure straddles the line between fintech copy-trading and yield optimization protocols, historically leveraging both centralized and decentralized models.

For Umoja's Synth Options, prioritizing liquidity and cost-effective execution is crucial for serving users at scale. Since centralized exchanges (CEXs) offer superior derivative market liquidity and lower transaction costs compared to decentralized exchanges (DEXs), due to network gas fees, they are the preferred choice initially.

However, using CEXs introduces new custodial risks. Addressing this involves focusing on the key benefits of DEXs: asset custody outside centralized control, full auditability, transparency, and permissionless withdrawals. By employing "Off-Exchange Settlement" providers, Umoja effectively captures these benefits, allowing for scalable synthetic dollars without over-reliance on a single liquidity source or custodian.

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