*️Protocol Risks

Below, you can find information about the risks of participating in the Flat Money markets.

General Risks

When interacting with any blockchain application, you should consider the following:

  • Caution should be exercised when interacting with any smart contract or user interface.

  • Smart contract risks are mitigated as much as possible through testing, audits and bug bounties. However, there is always a risk that vulnerabilities may be discovered in smart contract code after mitigations take place.

  • Phishing and scams are common in web2 and web3. In any event, always be sure to review what links you’re clicking on, ensure that you are using official user interfaces (UIs), and check every transaction you sign in your crypto wallet.

  • Blockchain related phishing scams can involve tricking a user to reveal their private keys, seed phrases, other sensitive information or tricking a user to sign malicious transactions. However, there are wallet-level tools like MetaMask Snaps, Wallet Guard, and Forta Alerts that allow you to detect malicious transactions before you sign them. Be sure to carefully review each transaction you sign.

  • It may be prudent to maintain two separate wallets, one wallet to store the majority of holdings and funds, and another wallet to use when interacting with new websites.

  • When interacting with new websites and signing transactions in your wallet it is important to check the contract being interacted with as well as the operation being signed, most wallets will display the name of the operation to be signed. You can refer to the tools included above as an added security measure, too.

Oracle Risks

While Pyth Network and Chainlink oracles provide decentralized, reliable price feeds, there is no 100% guarantee that these oracle services won’t experience issues in the future.

You can review the Protocol Security section for more information on the security information regarding Flat Money’s oracle solutions, as well as the Pyth Network Price Oracle section.

Liquidation Risks

The Flat Money protocol has an open-source liquidation process, where anyone can run a liquidation keeper. However, if losing positions are not liquidated in time, there is a risk that underwater positions (where a Leverage Trader’s margin becomes negative) can lead to socialized losses within the protocol’s shared liquidity pool and impact UNIT LPs.

Non-Delta Neutral Liquidity Providers (LPs)

There may be scenarios where the UNIT flatcoin will not be fully delta neutral and will have some positive or negative delta exposure. This happens in scenarios where the rETH long open interest either doesn’t reach the total UNIT LP amount or exceeds it.

The long open interest may be below UNIT LP amounts when the market is bearish or when the perpetual future market’s Borrow Rates are not favorable for Leverage Traders. Or simply, there may not be enough overall market long interest to hedge the UNIT LPs. In these scenarios, the funding rate would adjust to incentivize Leverage Traders to open long positions.

Due to the possibility of a negative Borrow Rate (where UNIT LPs pay leverage traders) and imperfect hedge, there may be periods where the UNIT LPs are not earning yield, or the overall value of the UNIT flatcoin is decreasing (negative yield). This downside risk may be offset by typically positive Borrow Rates, fees collected from Leverage Traders, and rETH’s native staking yield.

Max Long Open Interest

To avoid a scenario where there is a significant amount of long interest compared to UNIT LP collateral (UNIT LPs position is significantly net short), there is an open interest cap for Leverage Traders.

The open interest cap is set to 120% of the UNIT flatcoin’s rETH collateral and limits the risk of UNIT liquidation.

Any UNIT redemptions that would increase the net short beyond the cap are not possible under these specific market conditions. Therefore, there may be times when UNIT withdrawals are blocked until the Borrow Rate brings the skew back within range.

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