πŸ₯΅Risks

Synths and the Umoja Protocol incur the following risks:

Synth Unwinding

A Synth's position may be unwound (or halved) if its underlying collateral continues to be equal to or less than 5%. It's important that, if the user wants to maintain their notional exposure, that they top up their collateral.

Trading Fees

Trading fees are the cost of maintaining the Synths. When there's an increase in bi-directional market activity, trading fees are higher. Trading fees are debited from the user's collateral, occasionally requiring the user to top-up the collateral if it gets to low.

Black Swan Events

A crypto Black Swan event is when crypto prices change erratically and abruptly, preventing the Synths from reasonably adjusting their strategies to adapt to the reality of the market. In the event that a Black Swan occurs, Umoja deploys reserve capital from the Insurance Pool to protect Synth users.

Smart Contract Risk

Smart contract risk refers to the potential vulnerabilities and failures within the code of a smart contract that could lead to unexpected or malicious outcomes. This includes bugs, security loopholes, and design flaws that can be exploited to cause loss of funds, data breaches, or unintended contract behavior. Since smart contracts are automated and self-executing based on the code's logic, any error in the code is irreversible and can lead to significant financial and operational risks. Ensuring thorough testing, audits, and security practices are essential to mitigate these risks.

Exchange Failure Risk

Umoja faces exchange failure risk when using centralized finance (CeFi) exchanges or CEXs for derivatives trading to hedge digital asset collateral. This risk emerges if an exchange becomes suddenly unavailable, similar to the FTX incident, potentially impacting Umoja's Synth functionality. The protocol minimizes exposure by never depositing users' collateral directly on exchanges, instead using "Off Exchange Settlement" providers. This approach limits the protocol's vulnerability to any single exchange's failure, ensuring operational continuity and asset safety even in the event of an exchange collapse.

Custodial Risk

Umoja mitigates custodial risk from using OES providers for asset custody by diversifying across multiple providers and managing concentration risk. The main challenges include ensuring operational reliability for asset transactions, handling operational duties amidst exchange failures, and guarding against custodian operational failure. Umoja addresses these by frequent settlement of profits/losses and holding assets in segregated accounts, ensuring minimal impact on Synth functionality and stability.

Last updated