Since ParaSwap is a middleware, your funds are only exposed while a transaction is being processed. ParaSwap never holds custody of your assets - you stay in full control.
Understanding risks on ParaSwap
ParaSwap acts as a gateway to numerous DeFi services. Therefore, while using ParaSwap, users are assuming the technical risk of all intermediary bricks involved in the transaction.
The decentralized exchanges involved in any given swap implement their own security procedures for their smart contracts, like Curve Finance or Uniswap. You can also subscribe to an exchange-specific cover on services like Unslashed Finance or Nexus Mutual.
Now for the good news: with ParaSwap, users swap tokens!
It means that users are exposed to the technical risk involved with both ParaSwap's and the DEX(s) harnessed for the trade only for the time of the transaction: once the transaction is confirmed on the Ethereum blockchain - there is no going back.
1. Tokens Prices x ParaSwap
ParaSwap gives users access to all types of Ethereum-based tokens. Most of these tokens are not stablecoins - their $ or ETH price can vary. This variation has nothing to do with ParaSwap - it's driven by the markets & demand.
You remain exposed to the price fluctuations of your destination token, as long as you hold it.
Despite the name, stablecoins still incur a price risk and can break their peg.
Every trade has a price impact (slippage): the smaller the trade, the smaller the impact & ParaSwap optimizes swaps to reduce slippage while accounting for the gas costs of each added step. Check the dedicated page for more information on the price impact:
While swapping and holding tokens supported on ParaSwap, you assume the underlying risk of their token contract. ParaSwap does not hedge and is not responsible for risk tied to the tokens contract themselves.
3. Money Markets x ParaSwap
If the destination token represents a deposit on a money market like cDAI or aUSDC, users will also be bearing the technical risk of the underlying contracts as long as one holds it.
If your trade involves such tokens, it would be well advised to read about the underlying platform risk framework:
Some of our users interact with ParaSwap through an interface provided by an integrator, like the Argent or Monolith wallets.
In that case, they also face any risk involved with the services concerned and can refer to the specific service risk documentation to learn more about it.
5. Contextualization: Risk Breakdown Example
Let's consider an example swap of 5 ETH to aUSDC made using the Monolith Wallet:
Order routing of the example swap
The exhaustive risk framework for such a swap would be:
From the time the transaction is submitted to the moment it's confirmed:
Uniswap - Smart Contract Risk (ETH -> USDC)
Aave - Smart Contract Risk (USDC -> aUSDC)
ParaSwap - Smart Contract Risk (ETH -> aUSDC)
Assuming the user is holding the aUSDC tokens afterward, the following risks are assumed:
Monolith Wallet - Smart Contract Risk
USDC - Loss of Peg Risk
aUSDC - Token Contract Risk
All the smart contracts listed above have been audited several times & most of the risk presented here can be hedged against through insurance or other means.
🛡️ Hedging a technical risk of ParaSwap's contracts
ParaSwap follows a strict procedure to reduce operational risk. ParaSwap never holds custody of your assets.
While being a middleware reduces the scope of risk, it doesn't eliminate it. The main operational risk lies in the failure of one of ParaSwap's contracts. We implement several solutions to hedge for this risk: