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Risk Disclosure

General Risk​

In this paragraph, we describe the general risks associated with interacting with the protocol.

  • Blockchain Infrastructure: Since the protocol is deployed on an Ethereum Layer 2, it naturally inherits all the risks associated with this infrastructure.
  • Smart Contracts & Financial Attacks: Although the protocol has been audited by reputable industry auditors, this does not guarantee that the code is 100% free from bugs or potential economic exploits.
  • Oracle Risk: The protocol’s operations depend on inputs from an external oracle, which is therefore a core component of its financial mechanism. Even though several safeguard measures have been implemented, any manipulation of the oracle could cause damage to the protocol.
  • Stablecoin Depeg: Stablecoins are currently the only means of collateralizing operations within the protocol. Every participant interacting with the protocol must consider the risk of stablecoin depeg, even for well-known stablecoins, and fully assume the risk of a potential reduction in the value of these assets.
  • Low Liquidity Scenario: Any participant interacting with the protocol by opening a position is exposed to the risk of having to close that position in a low-liquidity scenario, potentially being forced to pay arbitrarily high slippage in order to exit the position.

Risk Management & Mitigation​

  • The protocol includes internal limits (MMR thresholds, margin checks, liquidation mechanisms) to reduce systemic exposure.
  • Trader and LP incentives are aligned through the dynamic virtual AMM (DynAMM) model, designed to maintain fair funding rates and balance between long/short sides and so the LP exposure.
  • Vaults are isolated per market, preventing contagion between different pairs.

Trader Risk​

Traders interact with the protocol using stablecoins to collateralize their positions. Positions can be long or short with leverage on the markets available in the protocol. By interacting with the protocol, they inherit the general risks mentioned in the dedicated section, in addition to those described in this paragraph.

  1. Market PnL Exposure: By opening leveraged long or short positions, traders expose themselves to market risk and may incur negative PnL, which will be deducted from their collateral.
  2. Liquidation Risk: When the margin ratio falls below the Maintenance Margin, it means that the collateral is no longer sufficient to cover the position according to the rules of the protocol. The position becomes partially or fully liquidable. The trader therefore loses part or all of the position, and the collateral is reduced by the PnL associated with that operation. The PnL, beyond reflecting the market loss, also accounts for the percentage retained by the liquidator for providing the liquidation service to the protocol.
  3. Funding Rate Risk: When opening a position, the trader is exposed to paying the Funding Rate, which contributes to generating negative PnL on the position and may lead to potential liquidations according to the rules described above.

LPs Risk​

Liquidity Providers (LPs) supply stable assets to the protocol vaults to enable trading activity on Denaria's specific perpetual markets. By depositing liquidity, LPs earn a share of protocol fees generated by traders’ positions. LPs effectively act as counterparties to traders, their return depends also on traders’ aggregated performance and market activity.

Each trading pair (market) has its own Vault where LPs can deposit a supported stablecoin. The Vault serves as the liquidity pool for the perpetual AMM, providing collateral for traders’ positions and enabling leveraged trading activity. After defining the amount of collateral to deposit, each LP can choose a liquidity provisioning strategy, deciding the preferred ratio between virtual asset and virtual stable exposure according to their market expectations.

  1. Market PnL Exposure: LPs collectively act as counterparties to traders.If traders are profitable overall, LPs may experience losses. Conversely, if traders are unprofitable, LPs capture those losses as profits. In the Denaria protocol, LPs are not directly exposed to asset price movements unless they passively assume exposure through their chosen liquidity composition (ratio between virtual asset and virtual stable) and traders' activities
  2. Funding Rate Imbalance: Although the Funding Rate mechanism is designed so that traders pay FR and LPs receive it, some LPs may end up paying funding if their exposure aligns with the side that is paying at that moment. Funding Rate income therefore depends on market imbalance and the LP’s current exposure.
  3. Liquidation Risk: Each LP position carries market exposure and can be liquidated, similar to trader positions. If the Margin Ratio falls below the Maintenance Margin, the LP position may be liquidated following the same rules applied to trader accounts. Higher LP position leverage increases the potential return but also the probability of liquidation. Unbalanced liquidity positions (e.g. with a high ratio of virtual stable or virtual asset) are more likely to gain directional exposure that, under adverse market conditions, could trigger liquidation.
  4. Imbalance fees: When providing or withdrawing virtual liquidity, LPs may incur imbalance fees if their action disrupts the pool equilibrium, meaning the internal pool price diverges from the oracle price. These fees are applied both on deposit and withdrawal if the operation increases the imbalance. Therefore, depending on market conditions, liquidity positions may pay additional fees at entry or exit.

Extra Important Notes:

  • Liquidity provision is not a risk-free activity.
  • Returns are variable and depend on market conditions and trader behavior.
  • The protocol operates in a fully permissionless and non-custodial manner; users remain in full control of their wallets.
  • Past performance does not guarantee future results.