Covered risks

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.

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 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

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.

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.

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	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

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 - YTs 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

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.

Options strategies

Risk	Description	Outcome	Coverage
Financial	The strategy generates negative returns	Partial loss of funds	Yes