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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.
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.

Automated Market Makers

Risk
Description
Outcome
Coverage
Impermanent loss
Change of the token price in the underlying pool
Reduced fiat ($) value
No

Lending Protocols

Lending protocols are mainly classified into two categories based on the type of loans they offer: overcollateralized and undercollateralized.

Overcollateralized lending

Risk
Descrption
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

Undercollateralized lending

Risk
Description
Outcome
Coverage
Borrower default
Borrower is not able to pay back the loan and is insolvent
Partial loss of funds
Yes

Liquid staking protocols

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.

Leveraged strategies

Risk
Description
Outcome
Coverage
Liquidation
Liquidation of the position at loss
Partial loss of funds
Yes

Options strategies

Risk
Description
Outcome
Coverage
Financial
The strategy generates negative returns
Partial loss of funds
Yes
Last modified 11d ago