Protocol Risks

Yearn’s core products are the vaults. Each vault runs at least one strategy, and each strategy is exposed to at least one protocol. Strategy and protocol risks are described here and here respectively.

The key protocols to which Yearn’s vaults are exposed are lending protocols, AMMs and protocols that enable leverage.

Lending Protocols

One of the simplest strategies is collateralized lending which involves lending assets on lending protocols to earn a yield. For example, a lending strategy will lend the underlying asset to the highest yielding lending protocol that meets the risk score requirements. This type of strategy is the most widely used in the single asset V3 vaults.

Examples of Lending protocols that Yearn strategies may use are Aave, Morpho, Spark, LlamaLend, and more.

Risk	Description
Governance	Admin key holders (or token holders) change the lending protocol adversely, e.g. accept risky assets with lenient risk parameters
Technological	Smart contract risk from interacting with lending protocols
	Liquidations do not occur as expected
Market	The value of the loans exceed the value of the collateral
	Low demand for borrowing leads to low yields
	Accepted assets become impaired
Oracle	Incorrect price feed causes the collateral to go to such a value that the loan is liquidated

Automated Market Makers

AMMs are used some of Yearn’s vault strategies to earn trading fees (and liquidity mining rewards if available) and may be used to exchange earned tokens for more of the underlying token.

Yearn's Factory vaults are the main consumers of AMM strategies. Examples of the AMMs to which Yearn’s vaults are exposed, are Curve Finance, Aerodrome, and Velodrome.

Yearn's process to sell reward tokens for the underlying and compound earnings has evolved over the years and now typically uses Auctions that fall back to cowSwap.

Risk	Description
Market	Lack of liquidity for the token being exchanged
	Trading volumes reduce leading to lower fees
	Impermanent loss due to the pool’s token prices changing relative to each other
Technological	Smart contract risk from interacting with AMMs
Governance	Token holders vote to change the AMM adversely

Leverage-enabling protocols

Leverage-enabling protocols are used in Yearn’s vault strategies to increase the yield. This is possible when a non-leveraged strategy earns a higher return than the cost of borrowing.

Examples of the leverage-enabling protocols to which Yearn’s vaults are exposed are Aave, Morpho, Moonwell, etc.

These kinds of strategies are typically reserved for higher risk Vaults. Sometimes a vault with a risk score of 2 can have some very light leverage, but typically these will be -3 and -4 vaults.

Risk	Description
Governance	Multi-sig or token holders vote to change the protocol adversely
	Poorly chosen risk parameters for onboarded collateral of underlying market e.g. collateralization ratios that are too low
Technological	Smart contract risk
Market	Liquidations are not processed correctly on Maker or Unit Protocol
	Stablecoin peg is not maintained
	Cost of uncollateralized borrowing increases such that Yearn’s strategies cannot utilize it
Oracle	Incorrect price feed leads to incorrect liquidation of positions

Liquidity mining protocols

A core strategy for Yearn’s vaults is to liquidity mine (or yield farm) protocols. Liquidity mining involves interacting with a protocol to earn the protocol’s native tokens.

Risk	Description
Governance	Admin key holders change protocol adversely, e.g. introduce penalties for withdrawals or steal funds
Technological	Smart contract risk of protocol or rewards contract
Market	Fall in price of token being farmed reducing the APY
	Liquidity of liquidity mined token on AMM is reduced or removed
Oracle	Delays or inability to withdraw liquidity in an emergency

These factors are all taken into account by the Yearn Security Team when scoring strategies using the Risk Score Framework.