Risks

PRISM introduces a range of interconnected risks that require a robust management and monitoring framework. These risks are actively measured, monitored, and managed through the Key Performance Indicators (KPIs) and Key Risk Indicators (KRIs) referenced in the accompanying transparency and risk limit documents.

Market Risk

Market risk encompasses losses arising from movements in market prices.

Yield Volatility: The forecasted yield for xPRISM is subject to market volatility. A sharp compression in yield across underlying strategies could lead to reputational damage and user withdrawals. This is monitored through net APY tracking against forecast.

Basis & Funding Rate Risk: The “Cash & Carry” strategy is exposed to basis risk, where the futures premium narrows or becomes negative, and funding rate risk for perpetual swaps. These are monitored by strategy-level basis and funding-related indicators.

Collateral Price Risk: In the overcollateralised lending strategy, a severe and rapid crash in the value of collateral (e.g., BTC/ETH) could outpace the liquidation process, potentially causing losses if the collateral’s value falls below the loan amount despite conservative LTVs. This is monitored via lending book LTV and margin/liquidation stress indicators.

Asset Liquidity Risk: While cash & carry strategies may focus on large-cap tokens (e.g., BTC/ETH), allocations to other digital assets may face liquidity issues. It may not be possible to unwind positions quickly without adverse price impact under stressed conditions. This is monitored by non-core token allocation and concentration limits.

Stablecoin De-Peg & Issuer Risk: Novel or non-traditional stablecoins can carry different risk profiles compared to fiat-backed stablecoins. A de-pegging event, issuer insolvency, failure in a stabilization mechanism, or loss of market confidence could cause a sudden and material loss of principal. This is monitored via stablecoin issuer concentration metrics.

Credit & Counterparty Risk

This category covers the risk of loss from a counterparty failing to meet its obligations.

Asset Manager Risk: Yield generation is outsourced to Monarq Asset Management. Monarq’s registration as a CFTC/NFA regulated entity adds a layer of oversight, but any performance or operational failure at Monarq directly impacts OED and its users.

Exchange & Platform Risk: Capital may be deployed across centralized exchanges (e.g., Deribit, Binance, Bybit, OKX) and DeFi protocols (e.g., Aave, Morpho, Pendle, Euler). Each represents a distinct point of failure due to hacks, insolvency, or operational failures. This is tracked through counterparty exposure concentration monitoring. Off-exchange settlement solutions can mitigate some exchange risk, but may introduce dependency on settlement providers.

Institutional Borrower Risk: In lending strategies, OED may face credit risk from institutional borrowers via lending venues. While loans are overcollateralised, a major counterparty default can still trigger a complex liquidation process. The health of the lending book is monitored via LTV-based indicators.

Liquidity Risk

Liquidity risk includes the inability to meet redemption requests without incurring material losses.

Redemption and Liquidity Mismatch: A mismatch can exist between portfolio liquidity objectives and user-facing redemption timelines. In a market crisis, liquidity buffers may be stressed. This is monitored by the portfolio liquidity profile and redemption SLA adherence indicators.

Run-on-the-Bank Risk: A mass unstaking event is a primary risk. The unstaking queue and cooldown period are key mechanisms to prevent sudden drains and provide time to unwind positions in an orderly manner. Unstaking queue metrics serve as a leading indicator of redemption demand.

Operational & Technology Risk

This category includes risks arising from failures in internal processes, people, and systems.

Oracle Risk: Oracle dependencies on both native rates and external price feeds based on DEX liquidity can create a risk of divergence between sources. This is monitored via oracle health indicators tracking deviations to reduce exploit risk.

Smart Contract Risk: PRISM (ERC-20) and xPRISM (ERC-4626) smart contracts may be exposed to bugs or hacks that could lead to loss of user funds. Continuous monitoring (e.g., via smart contract health indicators) is a critical mitigation.

Third-Party Reliance: The model relies on third-party service providers for key functions including asset management, custody/operations, smart contract monitoring, and oracle price feeds. A failure at any provider could disrupt the system.

Excessive Leverage: Using an inappropriately high level of leverage relative to NAV can magnify risks. This is monitored by gross portfolio leverage indicators.

Liquidation Risk: Higher leverage reduces buffers against adverse price movements and increases susceptibility to forced liquidation.

Counterparty Risk: Higher leverage increases total capital exposed to any single exchange, prime broker, or venue.

Operational Risk: Trading errors or system failures can have more severe consequences under higher leverage.

Regulatory & Compliance Risk

AML/CFT Risk: A structure where KYC’d users mint PRISM while xPRISM can be traded permissionlessly on secondary markets may create pathways to circumvent primary controls, posing AML/CFT risk that requires direct regulatory consideration.

BMA Scrutiny: High-yield products may face increased scrutiny from the Bermuda Monetary Authority (BMA). The structure, risk management framework, and disclosures must be robust.

Mitigating Controls: On-chain analytics to monitor flows and identify illicit activity, blacklisting/freeze capabilities subject to legal review, and clear disclosures on the issuer’s rights and user obligations.

Strategic & Reputational Risk

Contagion Risk & Conflicts of Interest: Accepting affiliated stablecoins as collateral can create contagion risk if an adverse event impacts those assets. Relationships among key counterparties can also create potential conflicts of interest that should be managed through arm’s-length terms and full disclosure. Counterparty exposure concentration indicators provide oversight.

Performance and Reputation Risk: Failure to deliver forecasted yields, security incidents, asset loss, or failure to meet redemption timelines can damage reputation and trigger user withdrawals. This is monitored through net APY and operational SLA indicators.