Risks

It is important to be aware of the various risks associated with DeFi protocols before utilizing SDX. Some of the potential risks of using SDX include:

Smart contract vulnerabilities: As of now, SDX has not yet undergone an audit. Therefore, it is crucial to exercise caution and use the platform at your own risk.

Market manipulation: Since SDX relies on the Pyth's oracle for pricing its options, there is a risk of incorrect pricing due to market manipulation or oracle attacks. However, SDX has taken steps to mitigate this risk by only supporting highly liquid assets, making it economically unfavorable for attackers to attempt such an attack.

Failure of Volatility and Skew oracles: SDX is dependent on off-chain data resources such as Deribit to compute historical volatility and skew. However, there is a risk of downtime if these resources become unavailable, which would hinder the ability to recompute volatility or skew. As a safeguard, the protocol has a deadman's switch mechanism to pause trading if the oracle fails to refresh values after a set period of time.

Mispricing of Volatility: For option markets with no alternative trading venues, SDX prices options primarily using historical volatility and relative volatility of other known markets. While backtesting has demonstrated the robustness of such a method over a sustained period, short-term mispricing may sometimes occur when market structures change. SDX limits the potential downside for LPs by introducing bid-ask spreads that widen with skew, trading caps and the volatility circuit breaker.

Failure of AMM to rebalance greeks via economic incentives: SDX's AMM relies primarily on external traders to rebalance portfolio Greeks using economic incentives determined by the pricing curves. However, in situations of extreme volatility, there may not be enough on-chain liquidity or trade volume to properly rebalance positions. This could lead to increased risks for liquidity providers.