Custodial Risk

What is custodial risk？

BitU manages collateral assets through custodial services; therefore, the inherent risks associated with these custodians directly impact the security and accessibility of the assets. This is referred to as "Custodial Risk." Compared to traditional financial systems, cryptocurrencies offer higher transparency and traceability but are also more vulnerable to cyber attacks. Key aspects of custodial risk include:

• Accessibility and Availability: The ability of BitU to deposit, withdraw, and manage delegations with exchanges can be impeded if the custodial service becomes unavailable or is degraded. This could disrupt trading workflows and the functionality to mint/redeem BITU.

• Execution Capability: In the event of an exchange failure, the protocol relies on cooperation and reasonable legal actions to facilitate the swift transfer of any unrealized PnL associated with the exchange. BitU mitigates this risk by frequently settling PnL with exchanges to prevent large amounts of profits from being held at the exchange.

• Operational Risk: Includes the possibility of the custodian's business failure or mismanagement. Poor management could lead to improper handling or unlawful use of assets. Moreover, the bankruptcy or financial crisis of the custodian could result in the freezing or loss of client assets.

How to Mitigate Custodial Risk？

In the BitU protocol, the backing assets are not owned by the custodian. Even if the custodial service provider or their creditors face financial issues or bankruptcy, they cannot claim ownership or any other legal claims over these custodied assets. This arrangement protects the interests of asset holders.

BitU mitigates risks by diversifying assets across multiple custodial services, thus avoiding reliance on a single service provider. The protocol manages concentration risk by selecting custodians who are known for their robust security measures, good track records, and transparent operations. This approach helps minimize business risks associated with custodial services.