Covered risks
Products > Perpetual Yield Tranches > Covered risks
Each Perpetual Yield Tranche is based on one or more yield sources, which are exposed to a set of dependencies and risks. Additionally, every PYT is subject to underlying strategy and Idle PYTs infrastructure risks.
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.
In general, Senior PYTs 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 PYTs-managed yield-bearing tokens' and the underlying asset
- the exchange rate between PYTs tokens and the underlying asset
Examples:
- A downstream lending market suffers a loss of funds and the price of the yield-bearing tokens deployed by PYTs decreases. The affected Junior and Senior PYTs are automatically paused.
- The PYTs’ main contract,
idleCDO, suffers a loss of funds, letting the attacker redeem deposited yield-bearing tokens. The price of the PYT token decreases. The affected Junior and Senior PYTs are manually paused.
PYTs 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 - PYTs 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 |
Risk | Description | Outcome | Coverage |
|---|---|---|---|
Financial | The strategy generates negative returns | Partial loss of funds | Yes |
Last modified 1mo ago