Exchange Failure Risk
Context
Seablocks actively manages its derivatives and spots positions across multiple centralized exchanges (CEXs) such as Binance, Coinbase, Bitget, Bybit, OKX, and Deribit to hedge the delta of its backing assets. While these platforms provide liquidity and access to global markets, there remains a risk that one or more of these exchanges could experience an operational failure, similar to historical incidents like FTX. This is the Exchange Failure Risk that Seablocks mitigates through a robust risk management framework.
Unlike platforms that rely on third-party custodians to hold backing assets, Seablocks directly manages its funds on CEXs and with institutional custodians. This ensures control over assets and minimizes exposure to exchange insolvencies.
What Happens in the Event of an Exchange Failure?
If an exchange were to become unavailable, Seablocks would immediately reallocate its backing assets and hedge positions to other active exchanges. Since backing assets are never fully concentrated on a single exchange, the protocol ensures that exposure to any single failure is limited.
In practical terms, if an exchange were to fail, Seablocks would:
Reallocate Derivatives Positions: The protocol would rebalance open hedging positions to alternative exchanges to maintain its delta-neutral stance.
Minimize Impact on Collateral: Any unrealized PnL at the failed exchange would be limited, as Seablocks settles profits and losses frequently to avoid excessive exposure.
Safeguard Stability: The failure of any single exchange would not impact the integrity of USDi or the security of backing assets.
Capital preservation remains a top priority for Seablocks. In extreme scenarios, the protocol’s first objective is to protect the value of backing assets and ensure the stability of USDi.
How is Exchange Failure Risk Managed?
Seablocks adopts a multi-layered risk management approach to mitigate exchange failure risks:
Diversification Across Multiple Exchanges: The protocol distributes hedging positions across multiple top-tier exchanges, reducing reliance on any single venue.
Real-Time Market Monitoring: Seablocks continuously evaluates the financial stability and operational security of its exchange partners, taking proactive action if risk profiles change.
Frequent PnL Settlements: The protocol regularly settles PnL to minimize unrealized balances on any given exchange, reducing financial exposure in the event of an exchange disruption.
Flexible Allocation Strategy: Seablocks dynamically adjusts position allocations based on liquidity, funding rate efficiency, and risk assessment of each exchange.
Current Exchange Allocation
Seablocks strategically distributes hedging positions across major exchanges to balance liquidity, funding rate efficiency, and security. The current portfolio allocation is structured as follows:
Exchange
Allocation (%)
Settlement Frequency
Binance
50%
Daily, 3 funding cycles
Bybit
25%
2-hour settlement, 1 funding cycle
OKX
15%
4-hour settlement, 1 funding cycle
Deribit
5%
Daily settlement, 3 funding cycles
Bitget
5%
4-hour settlement, 1 funding cycle
Seablocks continuously evaluates its exchange exposure and integrates additional liquidity venues as needed to further reduce concentration risk.
By implementing these strategies, Seablocks ensures resilience against exchange failures while maintaining operational efficiency and market stability.
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