😓Exchange Failure Risk

Context

Umoja Labs employs derivative positions to create certain Synths, like Synth Put and Synth Call Options, trading them on centralized finance (CeFi) exchanges including Binance, Bybit, Bitget, Deribit, and Okx. Therefore, should an exchange unexpectedly go offline, similar to the FTX incident, Umoja faces the challenge of addressing the fallout. This scenario is known as "Exchange Failure Risk."

Starting Beta V3, Users' collateral is NEVER deposited to exchanges and always resides with "Off Exchange Settlement" providers. Umoja has made every step to minimize exposure to exchange failures.

What happens in the event of a failure of an exchange?

Starting Beta V3, Umoja maintains full control and ownership over assets through Off-Exchange Settlement providers, ensuring no collateral is directly deposited on any exchange. This strategy significantly reduces Umoja's risk associated with unique events at any single exchange, limited only to the unrealized profit or loss (PnL) during settlement cycles with these providers.

In case an exchange fails, Umoja can swiftly move the collateral to a different exchange to manage any risks previously covered by the failed exchange. Such an event would lead to the closure of derivative positions, freeing Umoja from any further obligations to the exchange.

With a strong emphasis on capital preservation, Umoja prioritizes safeguarding the integrity and functionality of Synths, even under adverse conditions, ensuring the platform's resilience and the protection of its users' interests.

How is the exchange failure risk managed?

Umoja Labs maintains a neutral stance towards all providers at every stage of its internal processes, ensuring flexibility and impartiality. To reduce the risk and minimize the potential fallout from exchange failures, Umoja diversifies its operations across several exchanges. The company is consistently seeking new liquidity sources to decrease reliance on any single provider.

Furthermore, Umoja Labs actively engages with the broader ecosystem, including investors, advisors, and industry peers, to stay ahead of potential risks. This proactive strategy allows for timely adjustments to exchange exposures as the risk landscape evolves.