> ## Documentation Index
> Fetch the complete documentation index at: https://docs.melt.finance/llms.txt
> Use this file to discover all available pages before exploring further.

# Risk Framework

> Understanding peg stability, counterparty, and smart contract risks

<Note>
  Transparency is a core tenet of the Melt architecture. While the protocol facilitates access to high-value assets, users must understand the underlying risk vectors.
</Note>

## Peg Stability & Liquidity Risk

Melt Assets are not algorithmically pegged stablecoins. Their value is derived from 1:1 backing and maintained via arbitrage.

**The mechanism:** If `QQQ` trades at 2,010 while the oracle price is 2,000, Market Makers are incentivized to mint new `QQQ` at \$2,000 (plus fees) and sell it on the book, forcing the price down.

**The risk:** During extreme volatility, liquidity withdrawal by Market Makers may widen bid-ask spreads and increase exit costs temporarily. However, assets remain fully backed at all times.

## Counterparty & Issuer Risk (RWA)

For Real World Assets, Melt functions as a gateway to regulated issuers (e.g., Ondo Finance, Backed Finance).

**The reality:** Token value depends on issuer solvency and custodian reliability.

**Protocol stance:** Melt performs due diligence to list only Tier-1 issuers. However, the protocol cannot control the regulatory standing or operational solvency of third-party off-chain entities.

## Smart Contract & Bridge Risk

Cross-chain infrastructure introduces technical complexity.

**Lock & Mint logic:** System security relies on bridge contracts — compromise could affect asset backing.

**Mitigations:**

* Audits by reputable security firms
* Bridge segregation to prevent contagion across different bridges
* Timelocks on governance upgrades allowing user withdrawals before changes take effect