# Risks

## What strategy does necUSD use?

necUSD takes deposits of accepted collateral into its vaults, then it transfers those assets into a decentralized perpetual exchange and then opens a 1:1 short against the value of the asset. For example, if you deposit 1 ETH into Hedge, we would then open a 1 ETH short on the perpetual exchange.&#x20;

## What are the risks?

* **Spread risk** - When the trades are opened, the user's position must maintain an adequate amount of maintainence margin to remain solvent. If the price of the perpetual future deviates to the upside by a significant amount, the users margin might not be sufficient to keep the trade open. In this case, the position might be liquidated and the user would lose their collateral.&#x20;
* **Funding risk** - When a necUSD trade is opened, the perpetual future incurs or gains funding every hour. Depending on how much divergence there is between the perpetual price and spot price, funding might turn negative and the user would have to pay to keep their short perpetual leg open. If negative funding persists for long periods of time, it could cause the users position to drop below its maintainence margin levels and enter liquidation.&#x20;
* **Execution risk** - As market conditions are constantly shifting, Nectar seeks to optimize the execution of opening and closing orders. However, there might be times where Nectar is unable to execute profitable trades and the user could lose money.&#x20;
* **Liquidity Risk**: There may be insufficient trading volume in the futures market for the particular contract being used as a hedge, which can make it difficult to enter or exit positions without affecting the price.
* **Leverage Risk**: Futures contracts often involve leverage, meaning a small market movement can lead to significant losses or gains, which may result in margin calls if the market moves against the hedge position.
* **Cost Risk**: There are costs associated with hedging, including commission, transaction fees, and the bid-ask spread, which can erode the benefits of the hedge.
* **Smart contract risk** - As with all DeFi protocols, there might be unknown risk vectors and code issues which could lead to a loss of funds.&#x20;
