Custodial Risk
Context
Seablocks relies on centralized exchanges (CEXs) and institutional custodians to safeguard protocol backing assets. This reliance introduces Custodial Risk, which refers to the operational and security risks associated with third-party custody solutions.
Counterparty risk remains a crucial factor in crypto, particularly in light of historical exchange failures. Seablocks mitigates this risk by ensuring that assets are stored with industry-leading custodians and that exchange deposits are diversified across multiple trusted platforms.
Overview
There are three principal risks associated with using CEXs and custodial wallet providers:
Accessibility and Availability: Seablocks must be able to deposit, withdraw, and allocate funds efficiently. If access to funds is restricted or degraded, it could impact trading workflows and the mint/redeem functionality of USDi.
Operational Performance: In the event of an exchange failure, Seablocks depends on timely cooperation and legal safeguards to ensure unrealized PnL can be retrieved. This risk is mitigated by settling PnL frequently across multiple exchanges to prevent excessive exposure.
Custodian Insolvency: While institutional custodians typically operate segregated accounts, a custodian's insolvency could temporarily disrupt asset transfers. To counteract this, Seablocks ensures diversification across multiple custodians, reducing concentration risk.
It is important to note that while these risks could impact short-term operational efficiency, they do not affect the underlying value of Seablocks' asset reserves.
Custodial Solutions in Use
Seablocks employs a multi-layered custody approach:
Funds Held on Centralized Exchanges: Assets required for liquidity and trading are stored on top-tier CEXs such as Binance, Coinbase, and Bitget, which maintain strong security practices and regulatory compliance.
Institutional Custody Solutions for Wallets: Funds outside exchanges are secured using reputable custodians such as Fireblocks, Anchorage Digital, or BitGo, which employ multi-party computation (MPC) wallets and institutional-grade security measures.
Risk Mitigation Strategies
To minimize custodial risk, Seablocks implements the following measures:
Exchange Diversification: Funds are distributed across multiple top-tier exchanges to avoid over-reliance on a single entity.
Regular PnL Settlement: Profits and losses are settled frequently to prevent large unrealized balances on any single platform.
Use of Segregated Custody Accounts: Custodial solutions ensure assets are bankruptcy-remote and protected from creditor claims.
Security Audits and Monitoring: Continuous assessment of custodial partners and exchanges to identify potential risks proactively.
By leveraging these risk management practices, Seablocks ensures a high level of security and operational efficiency while safeguarding user assets.
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