In order to discuss the risks of using Contango itโ€™s worth recapping some key features of the protocol:
  • Contango prices futures via spot and fixed-rate protocols, so itโ€™s reliant on the liquidity of these markets (Uniswap, Yield, Notional). The long-term vision is to aggregate as many markets as possible to offer the best liquidity โ€” read: price โ€” for expirable futures in DeFi.
  • Contango doesnโ€™t have an order book, nor liquidity pools, which means thereโ€™s no liquidity held on protocol (no TVL).
  • Even the traderโ€™s collateral is put to work for better capital efficiency on the underlying protocols so, again, no liquidity is locked within Contango.
  • Liquidations are not carried out on Contango, but on the underlying protocols.
  • At maturity Contango offers physical delivery to eliminate risks of price manipulation.
So, when using Contango, a trader should bear in mind the following risks:
  • Liquidity risk, i.e. the possibility of thin liquidity on underlying markets, especially when closing a position.
  • Market risk, i.e. sudden movements in price that can result in potential liquidations.
  • Smart contract risk, i.e. the risk of using protocols (i.e. lines of code) that can be hacked and exploited. Contango is currently undergoing multiple security audits.
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