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.