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 — read: price — 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.