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Risk Considerations

While Zhenglong is designed with security as a top priority, it's important for users to understand the potential risks involved. This document outlines the key risks to be aware of when interacting with the protocol.

System Risks​

Black Swan Scenarios​

Despite its safeguards, Zhenglong cannot guarantee perfect outcomes under severe and sustained market duress. We transparently highlight edge-case risks.

Stability Pool Drain Risk​

If there is:

  • A rapid, sustained drop in collateral price, or
  • A sudden spike in the price of the pegged token relative to the collateral (effectively increasing debt vs. backing),

…then the entire Stability Pool could be drained during rebalancing.

This may occur faster than new deposits can refill the pool, even with aggressive incentives in place.

If the Stability Pool is exhausted and further rebalancing is needed, the protocol may temporarily fall below 100% collateralization.

Undercollateralization Scenario​

What Happens Below 100% Collateralization?​

In this state:

  • Pegged tokens (zheTokens) are no longer fully backed by $1 of collateral
  • They begin to float freely and effectively peg to the collateral value
  • The system continues to function, but:
    • zheTokens become partially collateralized, priced by market expectations of recovery
    • SteamedTokens drop to $0, as they represent the residual risk buffer — now exhausted

This is the protocol's graceful degradation mode, which ensures fairness and ongoing composability — rather than hard shutdowns or arbitrary halts.

Post-Stress Recovery Path​

If Zhenglong's global collateralization ratio drops below 100%, the system enters a distressed mode where it remains fully functional, but with different economic behavior:

  • Pegged tokens (zheTokens) are backed by the proportional value of the remaining collateral
  • Recovery depends on:
    • Organic market dynamics: As confidence returns and zheTokens appreciate toward $1
    • Protocol incentives: STEAM rewards redirected to recapitalize the Stability Pool
    • Governance intervention: Community measures to raise system health

Smart Contract Risks​

Oracle Reliability​

The protocol relies on price feeds to:

  • Determine collateralization ratios
  • Trigger rebalancing events
  • Calculate redemption values

Risks include:

  • Oracle manipulation
  • Delayed price updates
  • Technical failures in data transmission
  • Flash crash scenarios

Contract Vulnerabilities​

Despite audits and security measures, smart contracts may contain:

  • Undiscovered bugs
  • Logic flaws that manifest under specific conditions
  • Complex interactions with other protocols

Market Risks​

Collateral Volatility​

  • Dramatic price swings in the underlying collateral
  • Liquidity crises affecting collateral assets

External Market Factors​

  • Regulatory changes affecting synthetic assets
  • Broader market contagion from failures in other protocols
  • Changes in yield sources for collateral assets

Prevention and Defense Layers​

Zhenglong is designed to minimize the likelihood of ever reaching critical states, through:

Conservative Collateral Thresholds​

Stability mode is triggered well before the danger zone, using historically informed buffers designed to exceed any known 24-hour volatility windows.

Incentive Optimization​

  • Rewards encourage rapid Stability Pool participation during stress
  • Rebalance transactions include MEV-executable profit hooks to ensure swift execution

Real-Time Threat Monitoring​

Using advanced blockchain analytics, the protocol continuously scans for:

  • Oracle anomalies
  • Front-running attempts
  • Smart contract threats
  • Unusual market behavior

Risk Mitigation Strategies for Users​

1. Diversification​

  • Spread exposure across multiple protocol positions
  • Use both Collateral and Steamed pools
  • Consider balancing zheToken and steamedToken holdings

2. Position Sizing​

  • Only commit funds you can afford to lose in worst-case scenarios
  • Scale exposure based on your risk tolerance
  • Consider the correlation of Zhenglong positions with your other investments

3. Active Monitoring​

  • Track global collateralization ratios through the dashboard
  • Monitor on-chain metrics through analytics tools
  • Stay informed via community channels about market conditions

4. Understanding Recovery Mechanisms​

  • Be aware of protocol governance power in extreme scenarios
  • Understand soft-peg dynamics during recovery periods
  • Know how to participate in recapitalization efforts if needed

Conclusion​

While Zhenglong incorporates multiple safeguards and is designed for resilience, users should maintain awareness of these risks and make informed decisions based on their individual risk tolerance. The protocol's transparent approach to risk disclosure and graceful degradation mechanisms aims to provide users with both protection and clarity.

No DeFi protocol can guarantee zero risk, but Zhenglong's focus on risk management, transparent mechanisms, and community governance provides a foundation for responsible participation in synthetic assets.