Risks for users
Many teams focus on why you should use the products they make. But in crypto Defi, there are lots of risks, and it is responsible for a team to tell you those risks and reasons not to use the product.
We also outline steps we took to protect against these.
- Bad debt: In extreme market conditions, liquidating collateralized positions could fail to result in bad debts. Bao markets only accept the most liquid and robust collaterals. We work with other protocols and individuals to maintain a community of liquidators, direct a portion of fees to an insurance fund, and reduce collateral factors for larger positions to mitigate this risk. Regardless of these steps, a black swan event may cause collateral to lose value too quickly to be liquidated safely.
- Synth depeg: Market conditions dictate the price of tokenized synthetics like baoUSD and baoETH. While Bao Markets will always allow users to create new positions or repay old ones at the correct value, synthetic tokens can trade above or below the peg. We rely on market participants to arbitrage synths back to their pegged value by creating or closing debt positions or using "the ballast". During periods of high volatility, for example, in a market crash, it is likely that demand will be increased to purchase synths and close positions, putting upwards pressure on the market price. If demand for leveraged positions is high, it will have the opposite effect, creating sell pressure and possibly resulting in synths trading below the peg.
- High-interest rates: If synths start to trade below their pegs, one of the mechanisms to combat this is to increase the interest rate borrowers are paying, incentivizing the purchase and closing of positions.
- Underlying token volatility: The underlying tokens in each basket are subject to the behaviors or problems that their protocol faces. Bao mitigates this risk by preventing tokens within baskets from being tradeable with each other, like AMM LP tokens like Uniswap, Sushi, or Balancer LP, so any price movements will not affect the value of other token allocations in the basket.
- Front-end errors could break the ability to interact with the contract.
- Exploits: We do not know what we do not know. There may be undetected bugs in our contracts that could lead to a loss of user funds. To mitigate this risk, we use generous bug bounties, fork code from established and battle-tested protocols where possible, and rigorously test products.
- The Bao team may be unable to deliver on future stages of the project if they do not retain their technical talent, face financing concerns, or governance challenges such as being voted out of their positions. We try to mitigate this by rewarding our contributors at competitive rates while carefully managing our runway and seeking safe yield.
- The Bao team may be unable to deliver on future stages of the project if changing legal or regulation demands it. We try to air on the side of caution when making decisions that could have regulatory consequences.
- Due to technical challenges, the Bao team may not be able to deliver on later stages of the project. If this becomes apparent, the maintainer galaxy will propose a new agenda that includes a new vision and roadmap, aligning as much as possible with the current vision.
- Large investors may control governance decisions, particularly if voting participation is low. For example, a hypothetical whale with 2% of overall governance power would have 20% of the vote weighting if only 10% of total governance power participates in a vote. We have attempted to mitigate this by distributing tokens over diverse pools and including long-term locks that are bad for big liquidity providers who only use a project short term.
- Bao does not have a full-time engineering lead. It is a community project with a development team including talented students, part-time contributors, and a core of dedicated community members. This increases the risk of bugs and glitches that the project may not be able to respond to as quickly. To help with this, the community prides itself in supporting new contributors on their journey to become full-time contributors. We also expect to address this by hiring more developers.
It is essential to understand that BAO is not an offer for investment. It is a community project. When participants provide liquidity for our synthetics, they are rewarded with the Bao governance token, which lets users partake in the governance process and have a claim to fees from the ecosystem.
However, you should not buy Bao if you are not an active participant in the ecosystem, and you should not use bao at all, depending on your risk tolerance.
Please do not buy or use Bao if:
- You are buying Bao as a speculative asset.
- You think Bao can only go up.
- You do not know the emission plan or lockup.
- If you are using money you cannot afford to lose.
- You are concerned about the short-term price.
- You are using too much of your portfolio in Bao.
- You are unfamiliar with Impermanent Losses.
- You are not interested in the long-term of the project.
- You are unable to interact with a contract via Etherscan directly.
- If you do not actively keep up with projects when you hold their token.
- You do not want to vote on governance.
- You have a low-risk tolerance.
Like all Defi startups, Bao has a risk that it may not be successful or may drop in price.
If you do not understand this, then please do not use Bao.
Bao Team will be focused on making decisions that are best for the long-term healthiness of the Bao products, governance, and community; this means that in the short term, these decisions may not always be best for the price of tokens.
Your use of Bao products should be focused on earning more Bao tokens and the long-term success of the bao system.