Strategy Risks

Yearn earns income from lending, liquidity mining and trading fees. This income is often increased using leverage.

Lending

Collateralized lending is when an asset is lent in return for a yield paid by the borrower. The borrower has to lock up a greater amount of collateral than the value of the loan to incentivize the repayment of the loan.

Risk

Description

Governance

Admin key holders change lending protocol adversely, e.g. change the interest rate model in such a way that discourages borrowing

Technological

Smart contract risk of interacting with lending protocols

Market

Low demand for borrowing the asset causes low lending yields

Collateral price falls causing the lending protocol to become undercollateralized

Lent assets become unavailable to withdraw because the utilization ratio becomes too high

Operational

Delays or inability to withdraw assets from the lending protocol in an emergency

Liquidity Mining

Liquidity mining involves interacting with a protocol to earn the protocol’s native tokens. The interaction can be as simple as staking an asset in a protocol’s staking contract, or more complicated such as staking SNX to mint sUSD in Synthetix to earn SNX rewards.

In most cases the liquidity mined token is exchanged for the Want token on an AMM.

Risk

Description

Governance

Admin key holders change protocol adversely, e.g. introduce penalties for withdrawals

Technological

Smart contract risk of rewards contract

Smart contract risk of AMM used to exchange the liquidity mined token for the Want token

Market

Fall in price of token being farmed

Liquidity of liquidity mined token on AMM is reduced or removed

Operational Risk

Delays or inability to withdraw liquidity in an emergency

The Safe Farming Committee decides which protocols are secure.

Trading Fees

Trading fees are earned in Automated Market Makers (AMMs) by providing liquidity.

Risk

Description

Governance

Admin key holders change protocol adversely, e.g. reduce rewards paid to liquidity providers

Technological

Smart contract risk of AMM (e.g. Curve Finance, Sushiswap or Uniswap)

Market

Trading volumes reduce leading to lower fees

Impermanent loss](https://academy.binance.com/en/articles/impermanent-loss-explained) due to the pool’s token prices changing relative to each other

Operational Risk

Delays or inability to withdraw liquidity from the AMM in an emergency

Leverage

Risk

Description

Governance

Admin key holders change the lending protocol adversely

Technological

Smart contract risk of lending protocol (Aave, Compound Finance, Maker, Unit protocol)

Market

Risk that the debt is liquidated due to a price fall

Risk that income is lower than the cost of the flash loan

Oracle

Incorrect price feed

liquidation penalties

Operational Risk

Operational risk of managing debt positions

Strategy Scoring System

Initial attempt at a strategy scoring system.