πŸ₯΅Custodial Risk

Context

Given that Umoja relies upon OES provider solutions to custody protocol backing assets for user's leveraging Synths that require CEX trading strategies, there is a dependence upon their operational ability. This is the "Custodial Risk" we're referring to.

Counterparty risk is a prevalent issue throughout crypto and has never been more important than it is today. We're confident in the trust we are placing in custodians, whose business models are built on the safeguarding of assets vs. the alternative of leaving collateral sitting on a centralized exchange.

Overview

Using an Off-Exchange Settlement provider for custody presents three main risks:

  1. Accessibility and Availability: Umoja's ability to manage funds, including deposits, withdrawals, and delegations to/from exchanges, is crucial. Any disruption in these functions could affect the trading operations and the functionality of certain Synths dependent on centralized exchanges.

  2. Performance of Operational Duties: Should an exchange fail, Umoja relies on the cooperative and lawful actions of the exchange to swiftly transfer any pending profits or losses (PnL). To minimize this risk, Umoja regularly settles PnL with exchanges, as exemplified by Copper's Clearloop, which settles PnL every four hours.

  3. Operational Failure of Custodian: Though large-scale crypto custodian failures are rare, they are possible. Assets are kept in segregated accounts to protect against custodian insolvency, which could otherwise impact the creation and use of CEX-dependent Synths. Solutions like bankruptcy-remote trusts or MPC wallet solutions ensure custodians or their creditors can't claim these assets.

Starting in Beta V3, Umoja mitigates these risks by diversifying collateral across multiple OES providers and managing concentration risk, ensuring no single provider holds a disproportionate amount of collateral. This approach, alongside using several OES providers for the same exchanges, helps to reduce the aforementioned risks effectively.

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