Risks and mitigation

Leveraged Options Vaults (LOV)

Cega vault strategies are sophisticated investment products that carry risks and are not suitable for investors who do not comprehend the product or are risk averse.

Risks include:

(1) Credit risk— if a market maker (MM) defaults, they may not pay the yield owed to depositors for the 27 day trade. However, there is no credit risk for the depositor’s invested capital because it is 100% collateralized on-chain and not engaged in lending. Cega has strong risk management practices including signing ISDA legal agreements with MMs, and choosing accredited MMs who pass KYC and who have a history of credit worthiness;

(2) Principal at risk— if markets experience a significant downturn (eg. 50% decline) and crypto asset underlying prices exceed the knock-in barriers, investors may lose some portion of their initial investment

(3) Magnified loss upon knock-in – due to the leveraged position, an investor will face higher loss of principal at expiry if there was a knock-in event during the trade. The loss is magnified by the leveraged option level (e.g. 2x) and in total cannot exceed the amount of invested capital in the vault trade

(4) Smart contract risk— there is smart contract risk associated with depositing funds on-chain. To ensure security, Cega enlisted top firms to audit its code and has an ongoing retainer for new features. The Ethereum smart contract was double audited by Ottersec and Zellic. The Solana smart contract was audited by Ottersec and saw security consultation by Zellic during the development process.