Risk Assessment¶

Sera Protocol is committed to transparency. This page outlines known risks associated with using the protocol. Users should understand these risks before participating.

Smart Contract Risk¶

Description¶

All on-chain protocols are subject to smart contract vulnerabilities. Bugs in the code could lead to loss of funds.

Mitigations¶

• Professional security audits (pending)
• Extensive internal testing
• Testnet deployment with community testing
• Bug bounty program (planned)

Oracle Risk¶

Description¶

The FCICAMM relies on external price oracles to determine swap rates. Oracle failures or manipulation could result in:

• Stale Prices: Trades execute at outdated rates
• Price Manipulation: Attackers exploit oracle lag for arbitrage
• Oracle Downtime: Swaps may fail if oracle is unavailable

Mitigations¶

• Use multiple oracle providers with automatic fallback
• Implement price‑deviation checks and circuit‑breaker logic
• Adopt TWAP as a benchmark and automatically pause trading when any oracle price deviates from TWAP beyond a configurable percentage (based on daily high/low ranges)
• Grant admins the ability to pause trading during oracle anomalies
• Trigger an automatic pause when a quorum of oracles diverge beyond a set threshold

Stablecoin Depeg Risk¶

Description¶

Sera facilitates FX swaps between stablecoins pegged to different fiat currencies (e.g., USDT → XSGD). If a stablecoin temporarily loses its peg due to market panic (e.g., USDC during the SVB crisis), there is a theoretical risk of arbitrage drain. However, this risk is primarily associated with Large Cap stablecoins that operate through intermediaries, where depegs are often reflections of market sentiment rather than underlying insolvency.

For example:

• USD Markets (e.g., USDT/USD): High redemption pressure often plays out in deep secondary markets, causing temporary price dislocations (depegs) as the market prices in sentiment.
• Non-USD Markets (e.g., XSGD/USD, MYRC/USD): Secondary markets are currently less mature. Without deep liquidity to reflect panic selling, short-term depegs are significantly less likely to occur. The primary redemption channel remains the dominant price anchor.

For instance, during the USDC/SVB crisis, Circle maintained 1:1 redeemability throughout, despite the secondary market panic.

Unlike the U.S. model, where bonds may form part of the backing, many Non-USD stablecoins are strictly regulated, 100% fiat-backed, and safeguarded by major financial institutions, creating inherent Depeg Risk Management. Additionally, the Non-USD ecosystem currently involves fewer intermediaries. Even as these stablecoins grow, unless regulatory changes allow redemption at different rates, depegs caused by intermediaries are likely to be temporary sentiment-driven events, with 1:1 redemptions remaining available from the issuer.

Historical Context¶

According to Moody's, among a total of 1,914 depegs up to mid-September 2023, large cap stablecoins represented 609 instances. By comparison, in 2022, there were 707 large cap depegs (including the top five stablecoins by market cap) and a total of 2,847 depegs.

Notable Depegs¶

Sera's Structural Protection¶

Unlike traditional crypto AMMs (e.g., Uniswap, Curve) that allow direct USD-to-USD swaps (USDC → USDT), Sera offers specific structural protections:

• V0 (CLOB): Allows market makers to provide liquidity for USDC → USDT at their chosen rates, encompassing any depegged rates.

• V1 (FCIC AMM): Supports FX swaps of different currencies only (e.g., USDT → XSGD), creating a natural arbitrage barrier:

• FX Spread Costs: Arbitrageurs must cross the bid-ask spread twice (USDC → XSGD → USDT), incurring 40-100 bps of friction, for USD-to-USD swaps.

• Directional FX Risk: The arbitrageur is exposed to exchange rate risk (e.g., SGD/USD) during the round-trip, making this a FX bet rather than risk-free arbitrage.
• Liquidity Asymmetry: There may not be sufficient liquidity on the reverse swap (XSGD → USDC) to complete the arbitrage profitably.

Result: Sera's FX-only model significantly reduces the profitability and attractiveness of USD depeg arbitrage compared to traditional AMMs.

Residual Risk¶

Sera remains vulnerable to arbitrage if: - The depeg is severe and prolonged (lasting multiple days). - There is highly liquid reverse FX liquidity enabling fast round-trips. - The arbitrageur is naturally hedged (already short the target currency).

Mitigations¶

1. Curated Asset Selection: Only licensed, regulated, 1:1 fiat-backed stablecoins are supported (no algorithmic or under-collateralized stables).
2. Multi-Source Oracle: Sera's oracle incorporates fiat FX rates, on-chain DEX prices, and CEX spot prices to quickly detect deviations.
3. Circuit Breakers: If a depeg exceeds a defined norm, dynamic spread widening or emergency pause mechanisms are triggered.

→ View Supported Tokens on Testnet

Counterparty Risk (V0 CLOB)¶

Description¶

The V0 CLOB uses a hybrid model with off-chain order matching. While settlement is fully on-chain and non-custodial, the matching engine is centralized. In the future, we plan to decentralize the matching engine.

What This Means¶

• Your funds are always in your wallet until a trade settles
• The matching engine cannot steal funds
• The matching engine could censor or front-run orders

Mitigations¶

• Settlement requires your EIP-712 signature
• Orders can be cancelled permissionlessly on-chain
• We will launch a decentralized sequencer in the future

Regulatory and Real-World Risks¶

Description¶

Cryptocurrency markets and DeFi protocols operate within a complex global environment subject to geopolitical events, regulatory changes, and macroeconomic factors.

Considerations¶

• Geopolitical Conflict: Wars or conflicts involving major economies could lead to rapid currency devaluation, capital controls, or internet infrastructure disruptions affecting protocol access.
• Currency Attacks: Nation-state actors or large financial entities could attempt to manipulate the value of fiat-pegged stablecoins through speculative attacks or massive sell-offs.
• Regulatory Crackdowns: Jurisdictions may unpredictably ban or restrict FX trading, stablecoin usage, or access to DeFi frontends.
• Market Manipulation: While we mitigate on-chain risks, underlying assets could be subject to manipulation in off-chain markets, affecting oracle prices or stablecoin pegs.

Note: Sera Protocol operates as software. We cannot prevent sovereign nations from enacting policies that affect the value of the currencies traded on the platform.

Summary¶