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Below we outline the risk factors that may cause a de-pegging of UXD to USD, or a loss of principal value to UXD holders. All decentralized stablecoins assume some amount of risk by their nature.
We view the following as the primary risks faced by UXD stablecoin, although there may be other "unknown unknowns" not included in the below list. We have done our best to summarize them below but please reach out if you identify any others.
- Smart Contract Risk: By definition, a decentralized stablecoin must rely on smart contract code for its existence. If a smart contract written by UXD Protocol, or an underlying derivative exchange contains a critical bug, user funds may be irrevocably lost and UXD may no longer be fully collateralized.
- Negative Funding Rates: If the perpetual futures funding rates are negative for a period long enough to cause full depletion of the insurance fund, and if UXD holders have not redeemed their UXD stablecoin for assets by such time, UXD holders may become undercollateralized due to continued negative funding rates.
- Insurance Fund Asset Management Risk: The insurance fund will be deployed in asset management strategies for the benefit of UXD Stakeholders. If these asset management strategies carry unforeseen risk or if funds are lost due to exploitative hacks, UXD holders may become undercollateralized due to negative funding rates.
- Insufficient Liquidity to Exit UXD Positions: If the underlying derivative exchanges experience significant illiquidity in their perpetual futures markets, at the same time that a large number of UXD holders are attempting to redeem UXD for crypto assets, there may be insufficient liquidity to immediately redeem UXD for crypto assets.
- Supply/Demand Imbalance: Although the mint/redeem functions on UXD's website will allow unrestricted users to swap UXD for underlying crypto assets, there may be cases in which UXD trades off its peg on secondary markets. This may be due to a front-end application bug for the mint/redeem process, or a variety of other market conditions caused by an imbalance of supply/demand.
- Force position closure: If many of UXD's counterparties are trading on significant margin, and the underlying market is sufficiently illiquid, UXD could be force closed out of its positions, potentially disrupting the mechanics of the delta-neutral position.
- Borrower Defaults: As UXD is now backed in part by real-world assets, which hold real credit risk, it is possible that borrowers under these lending agreements do not repay the initial principal and/or post sufficient collateral.
- Liquidation Engine Failures: As a part of various asset holdings, protocols other than UXD developed
- Legal Risk from Third Parties: As UXD will hold real-world assets on its balance sheet, it may be subject to unknown legal risks or uncertainties from the particular legal documents that it may or may not be a party to. For example, a real-world loan agreement between a fintech lender in Brazil and a Small Business in Brazil may be a legal document that influences the value of the Real World Assets held by UXD.
- Fraud and Other Bad Actor Behavior: As UXD will hold real-world assets on its balance sheet, it may require reliance on the statement of third parties that may not be verifiable in an "on-chain" or cryptographically-secure manner. There is risk that these parties may misrepresent material facts.
- Bankruptcy Remoteness: As UXD will hold real-world assets on its balance sheet, it may require reliance on certain "bankruptcy remote" vehicles such as Special Purpose Vehicles (SPVs) to ensure security over assets in the case of a bankruptcy of a related entity. However, due to the multi-jurisdictional nature of Real World Assets, it may be the case that such an entity is consolidated onto the balance sheet of a related entity and may cause UXD Protocol or a related party to become a bankruptcy court claimant.