> For the complete documentation index, see [llms.txt](https://docs.nara.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.nara.io/nara-protocol/risks.md).

# Risks

### A Transparent Approach to Risk Management

Nara is designed to connect on-chain digital dollars with real-world payment financing opportunities. This creates potential benefits, but it also introduces risks. Users should understand these risks before holding NaraUSD, staking into NaraUSD+, providing liquidity, or integrating Nara into another product.

The purpose of this section is to describe the main risks, explain how Nara seeks to mitigate them, and identify what information users should review when evaluating the protocol.

#### Risk Categories

The risks associated with the Nara protocol can be broadly categorized as follows:

| Risk                    | Description                                                                          | Potential user impact                                                       | Mitigants                                                                     |
| ----------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ----------------------------------------------------------------------------- |
| **Credit risk**         | A borrower or counterparty may fail to repay a PayFi obligation.                     | Portfolio losses may reduce returns or affect capital protection layers.    | Underwriting, diversification, monitoring, exposure limits, insurance fund.   |
| **Liquidity risk**      | Redemptions may exceed immediately available liquidity.                              | Redemptions may be queued or delayed.                                       | Liquid reserves, maturity management, redemption windows, liquidity policy.   |
| **Smart contract risk** | Code vulnerabilities may affect accounting, transfers, staking, or redemptions.      | Funds or balances may be affected in severe cases.                          | Audits, testing, bug bounty, access controls, multisigs, timelocks.           |
| **Operational risk**    | Off-chain processes, partners, or service providers may fail to perform as expected. | Reporting, settlement, repayment, or redemption processes may be disrupted. | Operational controls, reconciliations, partner monitoring, incident response. |
| **Omnichain risk**      | Cross-chain messaging or chain-specific issues may affect transfers.                 | Transfers may be delayed, paused, or affected by chain-specific failures.   | Supported-chain controls, rate limits, monitoring, LayerZero configuration.   |
| **Regulatory risk**     | Legal or regulatory changes may affect access, transferability, or redemption.       | Some users or jurisdictions may face restrictions.                          | KYC/KYB controls, legal review, jurisdictional policies.                      |

#### Mitigation Strategies

Nara employs a multi-faceted approach to risk management, with specific strategies in place to address each of the risk categories:

**Credit Risk Mitigation**

**Rigorous Partner Due Diligence**: As outlined in the 'Nara's Asset Manager section, we conduct extensive due diligence on all our PayFi partners to ensure their creditworthiness and operational integrity.

**Diversification**: We diversify our investments across multiple PayFi partners and a wide range of underlying payment flows to minimize the impact of any single default.

**Overcollateralization**: In some cases, we may require our PayFi partners to provide collateral to further secure the financing.

**Liquidity Risk Mitigation**

**7-Day Redemption Period**: The 7-day redemption period for unstaking NaraUSD+ allows the protocol to manage its liquidity in a predictable and orderly manner.

**Liquidity Buffers**: We maintain a portion of our reserves in highly liquid stablecoins to ensure that we can meet redemption requests even during periods of high demand.

**Secondary Market Liquidity**: We are working with partners to provide a liquidity facility on a DEX for users who wish to redeem their NaraUSD and NaraUSD+ instantly.

**Smart Contract Risk Mitigation**

**Audits**: The protocol's smart contracts undergo regular audits by reputable third-party security firms to identify and address potential vulnerabilities.

**Bug Bounties**: We plan to launch a bug bounty program to incentivize security researchers to find and report vulnerabilities in our codebase.

**Best Practices**: Our development team follows industry best practices for secure smart contract development.

**Operational Risk Mitigation**

**Institutional-Grade Custody**: We use institutional-grade custody solutions, such as Hex Trust, to safeguard the protocol's assets.

**Multi-Signature Wallets**: Critical protocol functions are controlled by multi-signature wallets to prevent unauthorized access.

**Contingency Planning**: We have developed contingency plans to address a variety of potential operational disruptions.<br>


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