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Potential Risks to Automated Vault Investors

Delay in Executing Rebalancing:

  • Risk:
    • Delay in executing a rebalance transaction, potentially causing the asset price to deviate more than desired, incurring higher IL and swap fees. This could be due to network congestion or infrastructure issues.
  • Mitigation:
    • We have a robust infrastructure set up which ensures maximum uptime for our bots. We also have dynamic gas price adjustment to ensure our transactions are prioritized even during high-traffic. The system setup is similar to our liquidation bot operations which have been battle-tested in production environment for over one year, effectively managing automation over $1 billion in user capital.

Lack of Lending Assets:

  • Risk:
    • Lack of lending assets can pose two potential problems to the strategy. First is the tendency for the Vault to run at low or negative APR if the utilization goes above 90%. Second is the potential risk of not having enough supply to borrow as part of an impending re-balancing transaction.
  • Mitigation:
    • Our Interest Rate Model is designed to incentivize stakeholders to lower lending utilization during utilization spikes, and has been effective in quickly lowering utilization during over a year of testing. We also regularly adjust the interest rate curve to achieve an optimal utilization range in the lending vaults. We also make sure to limit the capacity limit of AVs to not push the utilization too high, and only increase capacity if additional lending supply has entered the platform to support the capacity.

Drastically Changed Market/Network Conditions:

  • Risk:
    • If the conditions of the market or network drastically change from those observed before, especially if it happens over a short time, that can invalidate the backtests or create additional cost pressures that did not exist before(e.g. lower underlying yields, higher asset volatility, lower asset market cap, network instability, lower liquidity in the LP pool, etc.). These different conditions could theoretically make the strategy unviable.
  • Mitigation:
    • We actively monitor the performance of AVs to ensure they function as expected, and make adjustments, where possible, to adapt to the current market environment (e.g. change the rebalance threshold, adjust interest rate curves, etc.). In a severe case where we deem that the AV strategy can no longer operate within our acceptable risk tolerance due to changed market conditions, we may decide to discontinue the product (as we did for Fantom AVs).

Extremely Volatile Market (Black Swan Volatility)

  • Risk:
    • In extremely volatile market conditions, we could be forced to rebalance the positions too often, realizing the impermanent loss on each rebalancing, causing the strategy's performance to drop. However, even in this situation, the strategy would still be profitable, just to a lesser degree. These kinds of conditions have not yet occurred in the past.
  • Mitigation:
    • We will constantly monitor the asset's price volatility and adjust the rebalance criteria to be suitable for the then market condition.

Smart Contract Risks

  • Risk:
    • While our smart contracts have been audited by third-party firms, they could theoretically have vulnerabilities. Integrated 3rd-party platforms like the AMMs we build on can also carry smart contract risk.
  • Mitigation:
    • Having smart contracts audited by multiple professional third-party firms decreases the chance of vulnerabilities. You can find audit reports here.
    • We also run a bug bounty program to provide incentives for people to look for vulnerabilities in our live code as an extra layer to filter out any potential issues. More on that here.
    • We carefully screen any platforms we integrate with, only working with those that have been audited and shown a track record of good security.
While we do our best to eliminate all the possible risks, DeFi is an industry where events that no one predicted can occur(the dreaded black swans). So please don’t invest your life savings, or risk assets you can’t afford to lose. Try to be as careful with your funds as we are with our code. 😊