⚡Risk Management

The R25 protocol employs a sophisticated risk management framework.

Overview of Protocol Risks

• Smart Contract Risk: Vulnerabilities in contracts (minting, staking, rewards, oracles, cross-chain).

• Market Risk: Adverse movements in the value of the Supporting Assets.

• Liquidity Risk (supporting assets pool): Difficulty liquidating illiquid assets (e.g., private credit) quickly to meet redemptions.

• Liquidity Risk (rcUSD/rcUSD+): Insufficient liquidity on secondary markets.

• Counterparty Risk: Default or failure of external counterparties (MMF providers, fund managers, borrowers, etc.).

• Operational Risk: Failures in internal processes, systems, or personnel of R25 entities.

• Governance and Transparency Risk: A lack of governance, financial and auditing transparency could impact trust in the protocol.

• Regulatory Risk: Evolving legal landscape for virtual assets and DeFi.

• Financial Crime Risk: rcUSD and/or rcUSD+ used as a conduit for money laundering, terrorist financing, and proliferation financing could carry potentially significant reputational risks.

• Compliance Risk: Evolving international frameworks, increasing compliance burden to combat money laundering, terrorist financing, proliferation financing, other financial crime and the imposition of sanctions may impact operations.

• Cybersecurity Risk: Security vulnerabilities and hacking, including breaches of smart contracts, leading to irretrievable loss of assets.

• Insolvency Risk: Extreme market movements causing IssuerCo to be insolvent. In the event of insolvency, holders of rcUSD will have an unsecured claim against IssuerCo for the face value of the rcUSD the holder owns.

• Technology Risk: Blockchain technology and the R25 protocol are experimental and may face unforeseen challenges.

• Legal and Enforcement Risk: Limited case law and judicial precedent with respect to smart contract enforceability and blockchain and token related disputes.

Mitigation Strategies

• Professional Investment Management: IssuerCo intends to retain a professional third-party investment manager and utilizes AI-driven risk solutions from Ant Digital Technologies for daily oversight, strategy execution, risk monitoring, asset security, and compliance. Real-time operational data of Supporting Assets is tokenized and monitored for performance and risk prediction.

• Smart Contract Security and Audits: Rigorous security audits by independent third-party auditors before deployment and after significant upgrades. Focus on vulnerabilities, critical functions (minting, burning, staking, rewards), proof-of-reserve, and circuit breakers to prevent over-minting.

• Diversification of Supporting Assets: Assets spread across various classes, geographies, and issuers to mitigate concentration risk.

• Active Liquidity Management: Use of MMFs and active cash flow management to ensure liquidity for redemptions. IssuerCo will set up a reserve liquidity pool to act as a second line of defense to deal with redemption surges and market volatility, with potential for additional credit enhancements from R25 (e.g., standby letters of credit).

• Additional Credit Support. Additional credit support from R25 adds buffer during credit events. R25 may employ additional credit enhancements including but not limited to third party credit enhancement, standby credit line, recourse to the obligors of the Supporting Assets, etc. to further enhance the risk management of the Supporting Assets.

• Transparent Reporting and Monitoring: Regular periodic reporting on reserve composition, valuation, and performance. Audited reports from a reputable accounting firm and real-time valuation via oracles. Continuous monitoring for anomalies.

• Institutional-Grade Internal Control: Procedures guided and managed with a reputable accounting firm.