Risks

All DeFi protocols, come with risks, which are important to understand before investing or depositing significant amounts of crypto. Some of the main risks involved are outlined here.

Smart Contract and UI Risk

There is a risk that the smart contract or UI has a bug or exploit for unexpected behaviour resulting in loss of funds. This risk is inherent to all smart contracts and relies upon the discipline of the development community, core contributors, and auditors.

Blockchain Risk

The Solana blockchain remains under development, which creates technological, uncertainty and security risks that Coin Capital® or ALPHADOG LLC has no control over. The cost of transacting on the Solana blockchain is variable and may increase or decrease at any time causing an impact on any activities taking place on the Solana blockchain, which may result in losses, price fluctuations or increased costs.

Oracle Risk

Most protocols used rely on Pyth for their price feeds to power liquidations. There is a risk that these oracles report incorrect prices which can result in wrongful liquidations and loss of all funds.

Levered/Social Loss Risk

In the event of sharp price movements, trades with levereage can lose more than their collateral value. In the event of the Insurance Fund not being sufficiently capitalised, these losses will be socialized across the Insurance Fund.

Liquidation Risk

Drift offers both leveraged perpetual swaps and borrow/lend. For perpetual swaps, there is the risk of liquidation when a user's margin ratio poses a stability risk to the exchange. The fund's collateral can get liquidated when the value of the collateral drops below the maintenance margin fraction.

Long/Short Imbalance Risk

The DAMM itself has delta risk, and this risk is magnified when market conditions skew on either side and the imbalance between longs and shorts increases.

The DAMM has protections in place to prevent the long short imbalance from skewing too heavily to either side. More information on that is here at: Drift AMM. Despite these protections, there is still a risk that the DAMM will be exposed to delta risk in periods of significant volatility.

No Off-Setting Loss Risk

The unrealized P&L we can lock in from entering and exiting a trade against the AMM is technically unbounded (e.g. if BTC goes toward infinity).

Whilst we can achieve this unrealized gain, it is important to note that an offsetting loss (or sufficient fees collected) is necessary before the unrealized gain can be settled in full and withdrawable as collateral by the fund.

Additionally, if the unrealized P&L imbalance exceeds its per-market threshold, those unrealized gains may be discounted by the margining system (initial, not maintenance) to prevent large borrows against it. This discounting would only impact new positions being opened and would not affect the fund's liquidation threshold.

Untimely Liquidation Risk

In the event of large-scale liquidations or market turmoil, there is a possibility that positions and balances are not able to be liquidated in time and are unable to cover the losses taken out by the liquidated user. The shortfall "or negative balance" is treated as levered losses.

In the past, levered losses in the main pool have been filled via top-ups from the Insurance fund. In the event that the Insurance Fund is depleted, there will be a socialized loss in the fund.

100% Utilization Risk

When an asset is fully utilized (100% of the supply is lent out), there will be no tokens left in the pool.