Risks of using Pods
Our mission at Pods is to create the easiest way to hedge crypto. This article aims to clearly outline all of the risks that you should be aware of when using the Pods app and interacting with the Pods protocol contracts so you can make more informed decisions when interacting with Pods.
Overview
Nascent technologies often come with short-term opportunities and costs associated with discovery and exploration. In DeFi’s case, exploration brings both wonders and risks. These should not be underestimated; neither by users, partners, team, or community members.
While creating incredible economic instruments, one needs to maintain a balance between permissionless innovation and risk analysis, and simultaneous mitigation.
If you want to learn more about risks in this space, this study provides a framework for users to leverage while interacting with DeFi.
Exploring the risks
Zooming in towards the lines of code, we observe various risks: smart contract risks, economic exploits, hacks, unexpected events (faulty logic in black swan events), centralization, oracle, AMM performance, and composability.
Some of them can be slightly mitigated however it is hardly impossible to make them all disappear completely. We’re doing what we can to fight against each risk and we urge users to understand that not only the Pods protocol but all DeFi protocols are built on extremely experimental technology and are subjected to failure (of all sorts), for the most part with no refunds.
Find below an in-depth explanation of each type of risk and what they represent for Pods.
Smart Contract Risk
We have been taking multiple safety measures to reduce the chances of having a bug going unnoticed, these include:
- Code audit with Solidified (August 2020) and Quantstamp (February 2021).
- New code audit starting on June 21st.
- Bug bounty live since April 28th, hosted with Immunefi.
- Use of testing tools such as Slither and Echidna.
- 99% test coverage on the contracts.
- Over 3 months of beta testing and bug fixing.
All our smart contract code is open source for you to inspect.
It’s important to observe that even though our code has been tested many times, there is still a risk of an edge case or bugs exist, which could result in user funds being lost.
Exploit Risk
An exploit does not necessarily translate into a bug in the contract, instead, it reads as a workaround a hacker found to game the system rules and profit from it at the expense of the contract users. Such an event is one of DeFi’s most unknown risks so far since it’s really tough to foresee an exploit, and it usually involves more than one protocol in one exploit.
Exploits usually result in user funds being lost.
Hacks Risk
Hacks may target admins controllers or vulnerabilities found in the code. As the core team, we're taking security measures to mitigate this risk.
Centralization Risk
All our code is open source and our team is publicly known. The Pods Finance Inc company is registered in the U.S. The team retains admin powers over the protocol as we have admin keys that are secured by a 2-of-3 multisig. The controlling EOAs (externally owned account) are themselves secured by a hardware wallet.
The admin keys allow us to work in the user's best interest when it comes to upgrading contract changes if needed. We expanded on our thought process for holding admin keys and explained the action we can perform with them as their limitations in the documentation.
We plan to reduce the centralization risk securely over time. However, holding the admin keys now is crucial for the possibility of rapid response and to keep building core functionalities of Pods Protocol.
Oracle Risk
Pods currently receives the price feed for the spot price of the underlying asset from Chainlink Price Feeds. The spot price is central to the BlackScholes calculation. Problems such as interruption, delays, or mispricing from Chainlink could cause a wrong Black Scholes calculation and impact trade prices and add or remove liquidity events.
As such a central piece, oracles failures may cause unexpected negative results on the AMM returns.
Currently, we’ve implemented the use of Chainlink’s Price Feed as a price provider. We are constantly exploring how to improve the reliability of price oracles and all learnings will be shared and implemented over time.
Black Swan Risk
Events like Black Swans are more often in crypto than we wanted them to be. Events like this can sometimes trigger unforeseen conditions on protocols that may result in unexpected loss of funds.
Event with hundreds of tests and simulations a certain the specific scenario where this condition is triggered may have stayed unnoticed for long before the event.
AMM Performance Risk
Supplying liquidity to Pods Options AMM is a strategy that has risks. Its result is a function of the underlying asset, the time to maturity, the direction of trades, the volume of trades, and the frequency of trades. It is not trivial to estimate exactly the return of a certain position beforehand and it could result in an impermanent loss or impermanent gain.
No pool is guaranteed to make money (over any time period) and users should be aware of that when deciding how to interact with Pods AMM and or options.
All important metrics can be found on Pods subgraph.
Composability Risk
One of DeFi’s most remarkable features, composability, also brings additional risk to the space. As the name suggests, the systemic risk reflects the impact of a situation and its impact on other market areas.
Pods is highly composable and started from day one allowing users to lock interest-bearing tokens from Aave as collateral. Problems with the connection between protocols are possible and they can potentially impact protocols in a domino effect.
That being said, it is important to highlight DeFi protocols are highly experimental technologies and we should not underestimate their risks.
We kindly ask you to be thoughtful of your funds and never allocate to Pods or DeFi assets that you are not willing to lose.
Acknowledgments
This blog post was inspired by Sets' initiative to write about "Risks of Using Sets" by Anthony Sassano. We highly appreciate their initiative and we encourage other projects to follow their example.
About Pods
Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
We invite you to take the first step in your new mission: start testing the app on app.pods.finance
Join the Pods community
app | website | documentation | blog | twitter | youtube | telegram | discord
