As with all of DeFi, there are several risks that our users and stakeholders need to be aware of.
At LEVEL, we have designed our liquidity system with an extreme focus on risk management, allowing LPs to select where they provide liquidity to match their risk tolerance. However, a few risks remain when acting as an LLP, including:
- LLPs are exposed to price movements in the underlying assets of each tranche
- LLPs take on the counterparty risk of traders on the platform, essentially taking on the opposite of their PnL
- Tranches can have an unbalanced exposure to assets - this occurs when the actual weight of the asset in a Tranche deviates from the target weight. In this scenario, the price of the LLP will be impacted due to changes in the underlying asset weighting.
- Tranches may not have enough available liquidity of an asset to service a trade with the default Risk Factor - this could occur when the trade size is particularly large or the utilisation of the target asset is already high in a certain tranche. In this scenario, LEVEL allocates the unavailable portion to the next Tranche in decreasing risk order. See further details and examples in Trade Examples.
- As experienced on several perpetual AMMs, there is a risk that external price sources are manipulated, where price data is collected whilst an attacker opens positions and takes profit on perpetual DEXs. LEVEL has taken steps to mitigate this risk by capping trade sizes of lower liquidity assets and tightening certain Chainlink Price Feed Oracle parameters.
Decentralized applications have inherent smart contract risks through vulnerabilities in their codebase. At LEVEL, security is our primary concern. As such, we have undergone several audits from both Quantstamp and Obelisk in addition to having a live ImmuneFi Bug Bounty. The LEVEL DAO has full ownership and oversight over the security of the platform and can commission any further security-related actions.