# Risks and Limitations

# Key Risks

Hack Risk

• DeFi protocols have been hacked before and there is a large incentive to steal user assets from the protocol. Collar has been designed in such a way that minimizes hack surface area to, on average, around ~25% of TVT (Total Volume Traded), since users take the majority out as a loan day one.

Layer 2 Risks

• These include sequencer downtime, MEV, or any other bespoke risk to any layer 2 Collar is deployed on.

Illiquidity Risk

• Users, when repaying loans, must consider the liquidity of the market they are repaying into. If the Uni v3 pool is illiquid, slippage could eat up a large portion of repaid funds, leading to poor execution.

# Key Limitations of Collar

Users must be comfortable temporarily limiting upside in order to protect downside

• This can be partially mitigated with rolls and even more so with "auto-roll", which remains under development

Savvy marketmakers to participate in the protocol actively

• Where there is money to be made, marketmakers tend to participate.

Lack of AMM liquidity

• This is rarely an issue, after all, if there's no spot market, why even try to create products that are more complex.

Potential barriers to understanding and entry

• Collar can be a lot for the average user to understand, which is why we're committed to transparency and simplicity.

Declined pricing for rolls in highly volatile times

• Marketmakers may not always provide roll pricing, which is a risk.

Lack of desire for marketmakers to quote the most volatile of tail assets

• Marketmakers may not be willing to quote the latest dog, frog, or memecoin.

Market impact upon sale of assets into DEX

• It's arguably better to have the market absorb this sale in good times rather than bad, however market impact is largely unavoidable, as it's inherently bearish to borrow against an asset.