Risks & mitigants

This section outlines the risks and mitigants of the Noon protocol.

Noon carries unique risks, which we have mitigated as much as possible. We will continue to further minimise risks we face as Noon matures.

Market risk

This is the risk arising from movements in the market leading to negative returns.

Mitigant: All of Noon’s strategies are constructed to be delta-neutral at all times, minimising its exposure to market risk. Noon’s battle-tested trading systems and algorithms have been rigorously tested in both virtual sandboxes and live environments, with no exposure to delta or other market risks.

Importantly, when Noon holds positions at a steady state, it is delta-neutral - it holds the exact amount of offsetting long and short positions, insulating the protocol from price movements in even the most extreme scenarios. In these extreme scenarios, our algorithms halt active trading - that is to say, we pause putting on or taking off positions - to protect our collateral base

Trading & execution risk

This is the risk arising from our trading strategies misfiring, or our execution logic breaking down, leading to negative returns.

Mitigant: We have been trading these strategies successfully for most of a decade, and have refined them through multiple cycles, booms, busts, and black swan events. We are confident in their performance across market conditions. We have also extensively back-tested these strategies under many heretofore unexperienced edge cases, and have not observed significant issues. Moreover, we have a redundant and robust monitoring and alerting system which carefully watches our trading infrastructure and our strategies' performance on a real-time basis to ensure we're aware of any unforseen issues.

Counterparty risk

This is the risk arising from our partners or service providers not fulfilling their obligations or defaulting.

Mitigant: The major counterparty typically at risk for trading strategies in web3 is the exchange where strategies are traded. We avoid this risk entirely by never holding our assets directly on any exchange. Rather, we use off-exchange settlement services offered by reputable web3 custodians. These custodians hold assets on our behalf, and mirror them over to exchanges to allow us to trade without exposure to the exchnage's counterparty risk. The other major counterparty for us is our tokenised treasury bill custodian. We hold these assets with a fully regulated and licensed broker, with redundant insurance coverage to minimise our exposure.

Additional details can be found in our Asset Custody section.

Negative funding environment risk

This is the risk that all other stablecoins that generate returns using the funding rate arbitrage strategy face - of funding rates turning negative, reducing their revenues to 0 (or even turning them negative).

Migitant: Having seen many negative funding rate environments, our traders are comfortable operating during these times, and understand how to invert our strategies to perform well. In addition, we have the ability to re-allocate our funds to tokenised treasury bills rapidly, which also allows us to thrive in this environment.

Low interest rate environment

This is the risk of a prolonged low interest rate environment, resulting in all treasury bill-backed stablecoins generating little to no revenues.

Migitant: We are fortunate that we are not entirely reliant on any one strategy like treasury bills - in a low interest rate environment, we will simply move our capital into delta-neutral strategies that are performing well at that time.

Liquidity RIsk

This is the risk of having insufficient liquid reserves to meet withdrawal requests.

Mitigant: This is a risk to all stablecoins with capital deployed to earn yield. Fortunately, our trading team has years of experience putting on and taking off positions in our delta-neutral strategies under time pressure. In addition, we are prioritising working with tokenised treasury bill protocols who are minimising time to redemption, further insulating us from this risk. Finally, we set reasonable withdrawal limitations to protect against mass withdrawals.

Smart Contract Risk

This is the risk of smart contracts being compromised, jeopardising our user funds.

Mitigant: We mitigate smart contract risk by largely avoiding holding assets on smart contracts. Our assets are held - at rest - either with reputable web3 custodians or qualified, licensed TradFi brokers. While we do use smart contracts to move funds, we test these contracts regularly and rigorously, and minimise the amount of time funds are held by them, to reduce attack vectors. Of course, all our smart contracts are audited by top web3 audit firms, and all major issues are resolves prior to deployment.