Stablecoin Risks

• The risk that a stablecoin loses its peg to its underlying fiat currency, leading to price volatility and potential losses.
• Depegging events can be triggered by market panic, liquidity crises, regulatory actions, or mismanagement of reserves.

• Regulatory scrutiny or government actions against stablecoin issuers could impact their availability, usability, or solvency.
• Stablecoins may also face censorship risk, where specific addresses or transactions are blacklisted by issuers or regulators.

• Many stablecoins are backed by fiat reserves held in regulated financial institutions. This introduces counterparty risk, as the solvency and operational reliability of these custodians can directly impact the stablecoin's stability.
• Custodial exposure also makes stablecoins vulnerable to systemic banking crises or insolvencies, as seen with events such as the Silicon Valley Bank collapse.

Stablecoins represent unsecured credit exposure to the issuer. If the issuer fails to maintain sufficient reserves or engages in risky practices, it could lead to insolvency and a loss of the stablecoin's value.

Decentralized stablecoins may rely on smart contracts or onchain mechanisms for stability. These systems are vulnerable to exploits, bugs, or market manipulation.

• The protocol avoids reliance on a single stablecoin to reduce exposure to risks associated with any one issuer, custodian, or reserve structure.
• A "basket" of stablecoins, including fiat-backed stablecoins (e.g., USDC, USDT) and decentralized stablecoins (e.g., USDe), is used to diversify risk.
• Allocations to stablecoins are periodically reviewed and adjusted based on market conditions, regulatory developments, and issuer reliability.

• Stablecoin solvency, reserve transparency, and price stability are closely monitored across major trading venues and onchain markets.
• Metrics such as trading volume, liquidity depth, onchain reserves, and peg stability are continuously analyzed to detect early signs of instability.
• If a stablecoin shows signs of instability (e.g., prolonged depegging, trade volume anomalies, or reserve concerns), the protocol rapidly reduces or closes positions in that stablecoin.

• The protocol maintains contingency plans for severe stablecoin disruptions, including predefined thresholds for depegging or solvency concerns that trigger automatic reallocation of assets.
• Hedging mechanisms (e.g., shorting a depegging stablecoin) may be employed during extreme market conditions to mitigate losses.

• The protocol provides regular updates on its reserve composition through its transparency dashboards and audit reports
• This includes detailed breakdowns of stablecoin holdings, liquidity buffers, and allocation strategies.