Benefits & Drawbacks

Benefits

· Level 2 fees are cheaper than Level 1 fees.

· Truly decentralized. There are no centralized counterparties. The system is managed fully on chain.

Drawbacks

· More capital requirements - Significantly more collateral required then Level 1. Level 2 requires 300 – 500% collateral to take-up positions in order to provide stability. Whereas Level 1 requires no collateral.

· Limited asset universe - Level 2 asset universe is finite. The asset universe that can be minted, is limited to the amount that is staked. Therefore Level 1 acts as a hybrid approach to slowly phase into Level 2 over time.

· Unbacked – assets are truly synthetic – they are unbacked. With Level 1 assets are pegged 1-2-1 to the underlying.

· Security - relies on Oracle prices to be up to date and secure. There are security risks if oracle prices are suddenly compromised.