Risk Warnings

Last Updated: July 31 2024

Cryptocurrencies, Blockchains and Options each carry a number of risks associated with holding, using or trading them. It is important to be fully aware of the sources and types of risks involved when using the OptSwap protocol and to account for them in your trading and business decisions.

BY MAKING USE OF OPTSWAP SERVICES, YOU ACKNOWLEDGE AND AGREE THAT: (1) YOU ARE AWARE OF THE RISKS ASSOCIATED WITH TRANSACTIONS OF CRYPTO ASSETS AND THEIR DERIVATIVES INCLUDING, BUT NOT LIMITED TO, THE RISKS LISTED IN THIS DOCUMENT; (2) YOU SHALL ASSUME ALL RISKS RELATED TO THE USE OF OPTSWAP SERVICES AND TRANSACTIONS OF CRYPTO ASSETS AND THEIR DERIVATIVES; AND (3) OPTSWAP DAO SHALL NOT BE LIABLE FOR ANY SUCH RISKS OR ADVERSE OUTCOMES.

I. Market Risk

Cryptocurrencies are volatile both by their nature and due to the structure of the market. This results in large, often unexplainable, rises and falls in the prices of the underlying assets (Price Volatility). Market Events may result in instant, and large, price movements upwards or downwards. The markets are open 24 hours a day, seven (7) days a week. Large price movements may occur at any time, including outside of regular business hours.

The prices of derivatives, such as Options, are based on the price of the underlying assets. Therefore, any price movements of the underlying assets against your options positions may result in a partial or total Loss of Capital.

II. Option Buyer Risk

Option Buyers face the risk of the partial or total Loss of the Premium paid if the option expires Out-of-The-Money. There is no guarantee that a counterparty may be available for you to close your position before expiry since the seller may be willing to allow the option to expire worthless.

III. Option Writer (Seller) Risk

Option Writers (Sellers) face the risk of the partial or total Loss of the Margin deposited if the option expires In-The-Money. There is no guarantee that a counterparty may be available for you to close your position before expiry since the buyer may be willing to take physical delivery of the underlying asset (Option Exercise), or settle for cash after expiration (Cash Settlement).

Writers (Sellers) of American style options face the added risk of Early Exercise or Early Cash Settlement at any time, even before expiration, if the option is In-The-Money.

IV. Blockchain Risk

Blockchains are distributed databases and computing networks usually run by a small or large number of miners or validators. Despite various redundancies which are built into the blockchain systems, the overall network can still experience partial or complete outage (Downtime).

During such downtime incidents, it may be slow or impossible to trade or settle your positions. If/when the network comes back online, there may be large price corrections, or movements, of the underlying assets which can result in unexpected losses in your positions (Mark-To-Market Loss).

Every transaction on the blockchain requires a fee to be paid to the network miners or validators (Gas Fees). During periods of high network congestion, the gas fees increase to accommodate the higher traffic at that time (Surge Pricing). This results in durations of High Gas Fees which may last from a few seconds to several hours or days. The network miners or validators may also choose to temporarily or permanently censor certain transactions; or reject all transactions with gas fees below a certain minimum threshold. This may result in unexpected higher costs, slower network speeds or the inability to perform transactions from your address (such as trading or settlements) on the blockchain network.

Blockchain networks have certain technical characteristics which may result in unanticipated situations such as 51% Attacks, Chain Reorganizations, Chain Forking, Artificial Intelligence or Quantum Computing Brute-Force Attacks (Technology Risks). In such cases, the issues have been historically resolved by technical or social consensus, but there is no guarantee that it may be resolved for future incidents. This may result in unexpected Downtime or a partial or total Loss of Capital.

V. Smart Contract Risk

Smart contracts are discrete pieces of software which operate on a set of given inputs and perform permanent, immutable or irreversible state changes on the blockchain. Transactions cannot be reversed or refunded under any circumstances. The OptSwap protocol runs on, and is governed by, various smart contracts which work together to provide the protocols features and functionality.

Bugs, Hacks or Exploits at the smart contract level may result in unexpected or unintended behavior and cause a partial or total Loss of Capital. Software audits and/or automated tests do not guarantee that a piece of software is free from bugs. New and unanticipated attack vectors may arise in the future due to unknown developments or research.

VI. Token Risk

Blockchain based Tokens (ERC-20, BEP-20, etc.,) are used in the OptSwap smart contracts as either the underlying asset, or cash token, or both. Some of these tokens represent Wrapped versions of other assets – such as Wrapped Bitcoin (WBTC); or are Pegged in value to Fiat Currencies – such as Tether (USDT), USD Coin (USDC) or Dai (DAI) – and are typically redeemable 1:1 for the original wrapped/pegged asset after minimal fees or slippage.

However, under circumstances such as Hacks, Bridge Exploits (Bridge Risk), Token Issuer Insolvencies or Extreme Market Conditions, wrapped/pegged tokens may lose their 1:1 backing, or their market value may drift partially or substantially, temporarily or permanently, from their intended peg or value (Depegging Risk).

Tokens implemented as Proxy Contracts may change their internal functionality resulting in unexpected or unintended behavior. These may result in unexpected partial or total Loss of Capital.

VII. Miner/Maximal Extractable Value (MEV) Risk

Miner/Maximal Extractable Value (MEV) is defined as the maximum value that can be extracted from block production (by network miners or validators) in excess of the standard block reward and gas fees; by including, excluding, and/or changing the order of transactions within a block that they produce or validate.

This may result in orders with unnecessarily high slippage being front-run by Generalized or Specialized Frontrunners or Arbitrage Bots. This may result in a worse than expected trade or fill resulting in a partial Loss of Capital.

VIII. Exogenous Protocol Risk

The Decentralized Price Meta Oracle derives Spot Prices and Settlement Prices for the Automated Market Maker and Decentralized Exchange. The Derived Prices are based on Liquidity & Time Weighted Average Price (LTWAP) Observation Snapshots taken from Decentralized Liquidity Pools based on the Uniswap V2/V3 protocol.

Since the Meta Oracle Derived Prices are wholly dependent on the underlying liquidity and prices reported by the liquidity pools, it inherits any vulnerabilities from the Uniswap V2/V3 protocol (Exogenous Smart Contract Risk). This may result in Cash Settlement Swaps being unavailable or unfeasible, or price or liquidity observations which may drift partially or substantially from off-chain markets. This may result in unexpected partial or total Loss of Capital.

IX. Oracle Manipulation Risk

The Uniswap V2/V3 Liquidity Pools provide Time Weighted Average Prices (TWAPs) which are fully decentralized and highly resistant to manipulation by design over longer durations of time. However, they may be manipulated over shorter periods of time by a bad actor with sufficient access to capital (On-Chain Price Manipulation Risk) and/or hashing power (51% Attack Risk).

While it is highly unlikely that a bad actor would be able to profit from such an attack due to opposing market participants, on-chain vs. off-chain price arbitrageurs, and the payoffs vs. costs of being a bad network miner or validator; such an attack cannot be ruled out when an Irrational Bad Actor is considered. This may result in unexpected partial or total Loss of Capital.

X. Divergence or Impermanent Loss Risk

Liquidity Providers who deposit funds into Uniswap V2/V3-style liquidity pools for staking or market-making activities face the risk of Divergence or Impermanent Loss. If one of the tokens in the pair has a large, sustained, movement to the upside or downside relative to the other, the liquidity provider sustains a loss on the funds held within the pool relative to simply holding the assets outside the pool.

If the funds are withdrawn from the liquidity pool before the exchange rate reverts to the value at which the funds were originally deposited, the liquidity provider may take a permanent loss on the difference (Loss of Capital). There is no guarantee that the exchange rate will revert to the original deposit value.

XI. Regulatory Risk

Changes to the laws and regulations in your country or any other legal jurisdiction may materially affect the value of the underlying assets and/or your positions. This risk is unpredictable and may vary from one legal jurisdiction to another. This may result in unexpected partial or total Loss of Capital.

XII. Black Swan Event Risk

There may be unforeseen, or unforeseeable, events which may occur in the future such as Zero-Day Vulnerability Exploits, Force Majeure Events or Acts of God, which are collectively categorized as Black Swan Events. These may result in unexpected partial or total Loss of Capital.