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Risks

Depending on how you use Perp88, you will be exposed to different risks. We discuss them here:

Risks to All Users

Smart Contract Risks

Nothing is in this world is entirely risk-free. Accidents do happen and just like how any DeFi protocols are still subject to smart contract risks, it would be dishonest of us to say that Perp88 is not susceptible to smart contract risks.

Mitigation:

  • As users' funds security is our highest priority, our team follows a highly rigid internal code review process to ensure our codes are secure.
  • Our contracts have also gone through an extensive security audit as an additional layer of security to ensure that are codes independently verified as secured by cyber security professionals.

Risk to Depositors

Accrual of Losses from Traders' Profits

As the PLP fund acts as the counterparty to the traders on Perp88, the fund profits when traders, as a group, make losses. By the same token, PLP fund also accrues losses when traders make profits, making PLP depositors the direct party to absorb the losses.

Mitigation:

  • We have implemented the Dynamic Funding Rate model, which aims to bring a balance between long and short exposure on Perp88. For example, when there is more long OI than short OI, the traders with short exposure will earn funding fees from long positions. Overtime, this will encourage more users to open shorts and close longs, bringing the OI on both side closer to equal. From the PLP perspective, this means they become more market-neutral. More details on our Dynamic Funding Rate here.
  • In addition, based on the historical data of other decentralized perpetual protocols, traders, as a group, tend to make a loss over time.
    • Traders on GMX have accrued a total of $45mn in losses since the protocol inception (Aug '21 - Sep '22) or roughly 12.5% of the market making liquidity.
    • Traders on Gains Network have accrued a total losses of $3.5Mn (Oct '21 - Sep '22) or roughly 35% of their market making liquidity.
Overtime, traders as a group tend to make losses, making PLP an attractive investment opportunity

Fully Utilized Assets

Assets in PLP are used as liquidity for leveraged traders. When there are open leveraged positions, assets within the PLP fund are reserved to pay out as profit to the traders depending on the size of their trades. This means there's a possibility, even though highly unlikely, that all the assets within the PLP are being reserved for open positions. When that happens, depositors will not be able to withdraw any liquidity from the PLP fund until utilization of the assets goes down.

Mitigation:

  • Our Borrowing Rate model for each asset is directly proportional to utilization. As the utilization goes up, the Borrowing Rate also goes up. When this happens, leveraged traders would be incentivized to close their leveraged positions to avoid expensive Borrowing Fees (~90% APR) while depositors may deposit more assets as the yields from Borrowing Fees become more attractive. More details on the Borrowing Rate here.

Risk to Traders

Liquidation

Leveraged traders run the risk of liquidation when the losses of their open leveraged position exceed the liquidation threshold (i.e. the loss of a position and fees accrued reach 99% of the Collateral value).

Mitigation:

  • Perp88 relies on multiple sources of price feeds to protect leveraged traders on the platform from scam wicks or short-term rapid price movements in a volatile market condition. This greatly reduces the risks of liquidation for the position owners.
  • Perp88 has set the liquidation threshold for leveraged position at 99%, meaning the position owner would only be liquidated if the loss & fees accrued on the position reach 99% of the position’s collateral. Setting the liquidation threshold at 99% will greatly reduce the chance of position owner being liquidated.