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Risk & Security

This document outlines the risks and security considerations of using Unbound.

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Risk Categories

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1. Strategy Risk

Negative Funding Periods

• Risk: Funding rates can turn negative (~16% of time)
• Mitigation: PositionManager closes positions when funding < -0.01%
• Impact: Reduced yield during negative periods, but no losses from payments

Delta Drift

• Risk: Imbalance between wBTC value and short position
• Mitigation: Automatic rebalancing when delta > 5%
• Impact: Brief periods of directional exposure

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2. Exchange Risk

Extended Exchange Custody

• Risk: USDC collateral is held on Extended exchange
• Impact: If Extended is hacked/insolvent, USDC portion at risk
• Mitigation: Extended uses Starknet validity proofs

Note: 50% of deposits remain as wBTC in the vault contract, reducing exchange exposure.

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3. Smart Contract Risk

Vault Contract Bugs

• Risk: Bugs could lock or lose funds
• Mitigation: Simple ERC-4626 design, open source code

Swap Slippage

• Risk: Poor rates during wBTC ↔ USDC swaps
• Mitigation: Slippage protection + AVNU best routing

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4. Operator Risk

Backend Downtime

• Risk: Backend services go offline
• Impact: No new deposits processed, no rebalancing
• Mitigation: Funds remain safe; manual recovery possible

Operator Key Compromise

• Risk: Private key stolen
• Impact: Attacker could withdraw from Extended
• Mitigation: Secure key storage, monitoring

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Position Risks

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Price Movement (Hedged)

The delta-neutral design hedges price risk: Example based on $5,000 deposit ($2,500 wBTC + $2,500 USDC) Result: Price movements are offset by the hedge.

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Liquidation Risk

With 2x leverage on USDC portion:

• Liquidation occurs if BTC rises ~50% without rebalancing
• PositionManager monitors margin ratio
• Conservative leverage minimizes this risk

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Security Measures

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Best Practices for Users

1. Start Small: Test with small amounts first
2. Understand Risks: Funding can be negative, exchange has custody
3. Monitor: Check position status regularly
4. Diversify: Don’t put all funds in one vault

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Emergency Procedures

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If Backend Goes Down

1. Funds remain in Extended + vault
2. Owner can manually recover using operator wallet
3. wBTC in vault is always accessible

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Full Recovery

1. Close all positions on Extended
2. Withdraw USDC to operator wallet
3. Forward USDC to vault contract
4. Users withdraw their proportional share