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Products > Yield Tranches > Covered risks |
Each Yield Tranche is based on one or more yield sources, which are exposed to a set of dependencies and risks. Additionally, every YT is subject to underlying strategy and Idle YTs infrastructure risks.
{% hint style="info" %} Given the nature of the two classes of tranches, which differ in terms of risks and gains opportunities, it is possible to explain their behaviour through two scenarios: a Yield case and a Loss case. See Yield and Loss scenarios in the Overview section. {% endhint %}
In general, Senior YTs holders always benefit from the payout priority (first in line to redeem their funds) after events that can cause a decrease in:
- the exchange rate between YTs-managed yield-bearing tokens' and the underlying asset
- the exchange rate between YTs tokens and the underlying asset
{% hint style="info" %} Examples:
- A downstream lending market suffers a loss of funds and the price of the yield-bearing tokens deployed by YTs decreases. The affected Junior and Senior YTs are automatically paused.
- The YTs’ main contract,
idleCDO, suffers a loss of funds, letting the attacker redeem deposited yield-bearing tokens. The price of the YT token decreases. The affected Junior and Senior YTs are manually paused. {% endhint %}
YTs interact with a range of DeFi primitives, each with its own specific risks. Every primitive, though, share a number of common risks:
| Risk | Description | Outcome | Coverage |
|---|---|---|---|
| Smart contract | Exploit of a bug in downstream yield protocols' code | Partial loss of funds | Yes |
| Governance | Adverse changes to protocol parameter | Partial loss of funds | Yes |
| Asset de-peg | The peg of a token against another asset is lost | Reduced value against other units of account | No |
A list of specific risks affecting Automated Market Makers, Lending protocols, Liquid Staking protocols, Leveraged strategies and Options strategies follows.
| Risk | Description | Outcome | Coverage |
|---|---|---|---|
| Impermanent loss | Change of the token price in the underlying pool | Reduced fiat ($) value | No |
Lending protocols are mainly classified into two categories based on the type of loans they offer: overcollateralized and undercollateralized.
| Risk | Description | Outcome | Coverage |
|---|---|---|---|
| Incorrect price feed | Oracle manipulation or failure | Bad debt creation | Yes |
| Unappropiate collateral factors | Generation of untenable positions | Bad debt creation | Yes |
| Wrong liquidation | Liquidation does not work as expected | Bad debt creation | Yes |
| Risk | Description | Outcome | Coverage |
|---|---|---|---|
| Borrower default | Borrower is not able to pay back the loan and is insolvent | Partial loss of funds | Yes |
| Risk | Description | Outcome | Coverage |
|---|---|---|---|
| Validator key management | Loss of multisig keys holding staked ETH | Partial loss of funds | Yes |
| Slashing | Staking penalties for validators' network | Partial loss of funds | Yes |
NB - YTs do not cover Senior LPs funds in case of events leading to a de-peg.
| Risk | Description | Outcome | Coverage |
|---|---|---|---|
| Liquidation | Liquidation of the position at loss | Partial loss of funds | Yes |
Instadapp Yield Tranches
Instadapp lite vaults have automation functions, which automatically rebalance the vault during market changes. If the vault gets risky, it can first refinance into another protocol to maintain safety or deleverage by selling stETH and paying back the ETH debt. This kind of automation, if required or occurs, may incur losses caused by trading slippage:
- If the loss is less than or equal to 0.5%, the loss will be distributed proportionally among the funds deposited in the tranches. This usually occurs when the borrowing rate of WETH is higher than the lending rate of stETH.
- If the loss is between 0.5 and 5%, the Junior tranche will absorb the entire loss and the tranche will continue to work as usual.
- If the loss is greater than 5%, the automating pausing of the Tranche is triggered. Deposits and redeems are halted.
| Risk | Description | Outcome | Coverage |
|---|---|---|---|
| Financial | The strategy generates negative returns | Partial loss of funds | Yes |