Exchange Failure Risk

What is exchange failure risk?

Exchange failure risk refers to the potential disruptions that occur when centralized financial exchanges, used by BitU to manage mirrored collateral assets, suddenly become unavailable.

This risk involves managing the consequences of such failures to ensure the stability and continuity of returns distributed to users within the ecosystem. This type of risk is critical because it directly impacts the operational capability of the protocol to execute market financial activities.

How do we manage exchange failure risk?

In facing exchange risks, two aspects are affected:

1. Collateral Assets: To mitigate risks associated with exchanges, BitU introduces a third-party custodial service. The BitU protocol ensures all collateral assets are securely held by the third-party custodian, without transferring assets elsewhere, thereby maintaining asset transparency and security. In this way, as long as the safety of the collateral assets is ensured, there will always be sufficient assets to back the issued stablecoin.

2. Earnings: The earnings part is where actual losses could be faced, meaning that unrealized profits may not be recoverable. BitU manages the earnings settlement cycles with exchanges through the ALMM module to ensure that risks are minimized.

BitU selects reputable and experienced custodial providers and combines other risk management measures, such as asset diversification, regular audits, and ongoing security assessments, to protect assets from the impact of exchange failures.