> For the complete documentation index, see [llms.txt](https://paragon-protocol.gitbook.io/paragon-protocol/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://paragon-protocol.gitbook.io/paragon-protocol/start-here/risk-and-limits.md).

# Risk & Limits

Paragon is non-custodial — you always control your assets, but risks still exist.

## Risk & Limits

This page outlines:

* known risks
* how Paragon mitigates them
* the hard limits built into the protocol

***

### 1. Global Protocol Risks

#### Market Volatility

Crypto markets can move rapidly.

**Risk**

* price gaps
* slippage
* sudden volatility

**Mitigation**

* slippage controls
* routing optimization
* batching via Flow

***

#### Smart Contract Risk

All DeFi protocols carry contract risk.

**Risk**

* bugs
* unexpected edge cases

**Mitigation**

* audits
* open-source contracts
* emergency pause systems

***

#### Governance Risk

Protocol parameters may change over time.

**Risk**

* multisig / DAO decisions

**Mitigation**

* timelock delays
* public announcements
* scoped emergency controls

***

#### Third-Party Dependencies

Paragon relies on:

* oracles
* external DEXs
* infrastructure

**Mitigation**

* fallback systems
* circuit breakers
* graceful degradation

***

### 🔑 User Risk (Self-Custody)

**Risk**

* lost private keys
* phishing
* wallet compromise

**Important**\
If your wallet is compromised, funds cannot be recovered.

***

### 2. Execution Layer (Flow / Shield)

Paragon uses an intent-based execution system with batching and solver competition.

***

#### ⚠️ Key Risks

**Solver Availability**

* no solver response

**Mitigation**

* fallback to standard router
* multiple solvers
* timeout protection

***

**Execution Quality Limits**

* best route depends on available liquidity and venues

**Mitigation**

* allowlisted venues
* validation checks
* transparent execution metrics

***

**MEV (Not Eliminated)**

* MEV is reduced, not removed

**Mitigation**

* batching
* private transaction submission

***

**Batcher Downtime**

**Mitigation**

* instant fallback to standard swaps

***

#### 🔒 Execution Limits

* batch window: 1–2 blocks
* slippage default: 0.5%
* max recommended slippage: \~1%
* per-batch caps enforced

***

### 3. Liquidity Risks (AMM)

#### Impermanent Loss (IL)

LPs may lose value compared to holding tokens.

**Mitigation**

* trading fees
* emissions incentives

***

#### Thin Liquidity

**Risk**

* large trades can move price significantly

**Mitigation**

* route splitting
* UI warnings
* batching via Flow

***

#### Spot Price Manipulation

**Mitigation**

* TWAP checks
* oracle validation

***

#### 🔒 Limits

* max price impact: \~5% (UI guard)
* base fee: 0.20%
* LPs receive majority of fees
* protocol share supports buybacks and POL

***

### 4. Pricing & Oracle Risks

Paragon uses:

* Chainlink (primary)
* Pyth / Redstone (secondary)
* TWAP (fallback)

***

#### ⚠️ Risks

* stale data
* manipulated feeds
* stablecoin depegs

***

#### 🛡️ Mitigation

* freshness checks
* deviation filters
* TWAP cross-checks
* stablecoin safeguards

***

#### 🔒 Limits

* strict deviation thresholds
* minting disabled if unsafe
* redemption remains available

***

### 5. Index Risks (P10)

#### Tracking Error

**Risk**

* NAV deviation

**Mitigation**

* rebalance incentives
* controlled deviation ranges

***

#### Asset Risk

**Risk**

* exploits
* delisting

**Mitigation**

* reconstitution
* caps
* emergency removal

***

#### Mint Restrictions

If pricing becomes unreliable:

* minting is paused
* redemption remains active

***

#### 🔒 Limits

* mint caps per transaction
* daily supply limits
* oracle validation required

***

### 6. Treasury & Protocol Reserves

⚠️ **Important**\
Protocol reserves are **not insurance**.

***

#### Risks

* insufficient reserves
* extreme market conditions
* governance decisions

***

#### Purpose

* liquidity support (POL)
* buybacks
* protocol stability

***

#### Limits

* funded by protocol fees
* capped allocations
* governance-controlled usage

***

### 7. Circuit Breakers & Limits

#### Automatic Protections

* mint pause
* Flow fallback
* oracle degrade mode

***

#### System Controls

* intent expiry
* rate limits
* gas protections

***

#### Module-Level Pause

* Flow → disabled
* Index mint → disabled
* Farming → safe mode

***

#### Cooldowns

* delayed parameter changes
* protection against rapid manipulation

***

### 8. Incident Handling

#### Philosophy

Degrade — not stop.

***

#### During Issues

* swaps continue
* minting may pause
* redemption remains active

***

#### Signals

* OracleDegraded
* NavPaused
* FlowFallback

***

#### Recovery

* issue resolved
* governance update applied
* system resumes

***

### 9. Testnet Caveats

* mock oracle feeds
* reduced limits
* limited solver availability
* no real reward distribution

👉 Expect frequent changes

***

### 10. User Responsibilities

You should:

* verify contract addresses
* set slippage appropriately
* monitor execution conditions
* understand impermanent loss
* secure your wallet

Paragon protects execution — not user mistakes.

***

### TL;DR

* non-custodial system
* layered oracle protection
* Flow reduces (not removes) MEV
* minting pauses if unsafe
* redemption remains available
* protocol builds reserves over time
* system degrades safely under stress

Paragon is designed to prioritize user protection, transparency, and controlled failure over blind execution.