Custody Risk

Custodians and exchanges play a critical role in providing security, liquidity, and accessibility. However, reliance on these intermediaries introduces several risks that can impact the safety, availability, and integrity of digital assets like deUSD. This section highlights the key risks associated with systems that depend on custodians and exchanges.

To mitigate the below risks, Elixir utilizes off-exchange storage solutions (OES) like Copper Clearloop via a registered bilateral trading firm to store funds off of centralized exchange, while still being able to broadcast hedging orders to them. See "Centralized Exchange Execution" for more details.

1. Custodial Risk

Relying on custodians to hold and manage digital assets involves risks.

Long term Elixir will utilize non-custodial MPC infrastructure to secure them, mitigating the risk of centralized custodians being able to abscond with funds.

2. Exchange Security Risk

Exchanges are prime targets for cyberattacks due to the high volume of transactions and assets they handle.

• Hacking and Theft: Exchanges can be hacked, resulting in the loss of large amounts of cryptocurrency. Notable incidents include breaches of major exchanges leading to multi-million dollar losses.

• Insufficient Security Measures: Exchanges with inadequate security measures are more vulnerable to attacks, putting user funds at risk.

3. Liquidity Risk

Exchanges play a crucial role in providing liquidity for trading digital assets.

• Market Manipulation: Low liquidity can make it easier for bad actors to manipulate markets, causing price volatility and financial loss.

• Withdrawal Limits and Delays: In times of high demand, exchanges may impose withdrawal limits or delays, restricting access to funds.

Elixir only conducts hedging on exchanges with high liquidity, while also diversifying hedging across multiple platforms on both the centralized and decentralized side.

4. Counterparty Risk

Trust in the counterparty (custodian or exchange) is essential for the security of assets.

• Counterparty Insolvency: If a custodian or exchange becomes insolvent, users may lose access to their funds.

• Trustworthiness: The integrity and reliability of the custodian or exchange are crucial. Untrustworthy entities pose a significant risk to asset security.

5. Transparency and Accountability Risk

Lack of transparency and accountability in custodians and exchanges can lead to hidden risks.

• Opaque Operations: Lack of transparency in operations and financial health can obscure risks from users.

• Accountability Issues: Poor accountability mechanisms can result in mismanagement or unaddressed security vulnerabilities.