In order to discuss the risks of using Contango it’s worth recapping some key features of the protocol:

  • Contango prices expirables via spot and fixed-rate protocols, so it’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 β€” read: price β€” for expirables in DeFi.

  • Contango doesn’t have an order book, nor liquidity pools, which means there’s no liquidity held on protocol (no TVL).

  • Even the trader’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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