# Risks Overview

## Overview of Potential Risks

Blockchain, DeFi and smart contracts are young and experiment technologies, and come with risks. Orbit is not immune to these risks, even with strong risk mitigation and management frameworks.

It it first important to understand some of the potential risk vectors, here are a few:  

* Smart contract risks/model exploits (Orbit)
* Counterparty risks (depegging, counterparty protocols hacks/exploits/bad debt, bridging issues, withdrawal liquidity)
* Strategy risks (opportunity cost, risks with more advanced strategies)

For a more summarised version of risk management concepts see:\
[Risk Management](/orbit-docs/risk-and-security/risk-management.md)

## Risk management

Although these risks are present, Orbit takes a comprehensive approach to addressing and managing risks. Here is a breakdown of these potential risks and their mitigation strategies:

### Smart Contract Risks (Orbit)

Smart contracts often have potential hackers looking to exploit their vulnerabilities, but under this umbrella also comes model exploits. The greater the protocol grows, the larger the target on the back. 

Orbit addresses this through comprehensive audits by multiple top-rated auditors and bug bounties. Open sourcing of code also helps other developers to enhance the codebase.\
These measures aren't fullproof but dramatically help to reduce risks of exploits and hacks. 

### Counterparty Risks 

Counterparty risks are third party partner or integration risks. These involve protocols or stablecoins aggregated by the yield aggregator, or any infrastructure partners (Chains, bridging ect).\
Even though these are not directly controlled by Orbit, measures are taken to address and reduce these risks especially on the asset allocation and aggregator side. 

* Bridging is one of the biggest causes of large scale exploits in the space due to wrapped assets and centralised third parties (Validators, multisigs). By choosing IBC as the core infrastructure solution for Orbit this risk is dramatically reduced, removing middleman-risk or wrapped asset risks.
* Protocols aggregated by the Orbit strategy manager can also have their own risks either in their own models or external attacks. Orbit addresses this through the risk scoring and filtering process during whitelisting of new strategies: delving into protocol models, audits and historical data. But also measures on the allocation front to hedge and reduce dependance on individual strategies. 

### Strategy specific risks 

Individual strategies can have their own risks depending on the strategies themselves. The strategies regularly monitor for any sudden changes to the protocol and governance. 

It's worth noting that not all risks result in direct loss of funds, some are more centered around opportunity cost risks, when assets could have  been more productive elsewhere, with less risk.\
\
Here are some potential identified risks based on different strategies: <br>

1. **Yield Aggregation/Strategy Vaults**

| Risk Category       | Potential Identified Risks                                                                                                                                                                                                                                                                                                                    |
| ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| Technical Risk      | <p>Aggregators rely on multiple protocols; failure in one protocol can cascade.</p><p><br></p><p>Oracle or price feed issues can cause incorrect rebalancing decisions.</p>                                                                                                                                                                   |
| Governance Risk     | Each vault or aggregator may change parameters (e.g., yield strategies, fee structures) via governance votes.                                                                                                                                                                                                                                 |
| Smart Contract Risk | <p>Complex vault strategies may leave room for exploits.</p><p><br></p><p>Aggregators usually integrate multiple smart contracts and have third party dependencies which increases the attack surface.</p>                                                                                                                                    |
| Market Risk         | <p>Unstable yields if the underlying strategies depend on volatile tokens or farming incentives.</p><p>Inefficient funds allocation leads to lower than expected yields.</p><p>All the edge cases identified above and all the rebalancing/portfolio optimization risks due to low liquidity, slippage, overconcentration, etc apply here</p> |

<br>

2. **Liquidity Provision**

| Risk Category       | Potential Identified Risks                                                                                                                                                                                      |
| ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| Technical Risk      | <p>In cross-chain deployments, bridges can fail or be hacked.</p><p>Liquidity fragmentation affects adversely during periods of high volatility.</p>                                                            |
| Governance Risk     | <p>Dex fees or pool parameters can be changed by governance, affecting LP profits.</p><p><br></p><p>Potential delisting or changes of listed pairs.</p><p><br></p>                                              |
| Smart Contract Risk | <p>If yield is auto-compounded, additional contract layers add complexity.</p><p><br></p><p>Some AMM designs can be exploited by front-runners if the pool logic or oracle updates are slow or manipulable.</p> |
| Market Risk         | <p>Impermanent loss if one side of the LP experiences a large price move.</p><p>If it’s a derivatives pool (e.g., dYdX), liquidity providers may face heavy drawdowns during high-volatility events.</p>        |

3. **Leverage/Perpetuals**

| Risk Category       | Potential Identified Risks                                                                                                                                                                                         |
| ------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| Technical Risk      | <p>Oracles and liquidation bots must operate reliably. If they fail, positions may accrue large uncollateralized losses.</p><p>Protocol or blockchain congestion can prevent timely margin calls.</p>              |
| Governance Risk     | <p>Protocol parameters (e.g., max leverage, collateral factors) can change.</p><p><br></p><p>Upgrades to how margin or liquidation is handled can alter user risk.</p><p><br><br></p>                              |
| Smart Contract Risk | Exploits specifically in margin or leverage logic (e.g., price manipulation to force liquidations).                                                                                                                |
| Market Risk         | <p>Leverage amplifies the movement in prices, therefore sharp swings in asset prices can liquidate positions very quickly.</p><p>Funding rates can shift unpredictably, impacting leveraged trades.</p><p><br></p> |

4. **Stablecoin/Synthetic Assets**

| Risk Category       | Potential Identified Risks                                                                                                                                                                                                         |
| ------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| Technical Risk      | <p>Mechanisms that keep the stablecoin peg rely on oracles, governance, or external protocols. Any technical failure can break the peg.</p><p>Cross-chain bridging issues can arise if stablecoins are minted on other chains.</p> |
| Governance Risk     | Adjustments to peg stability parameters, collateral requirements, or mint/burn mechanics can affect token stability.                                                                                                               |
| Smart Contract Risk | If the stablecoin relies on a complex price mechanism, there’s an added layer of risk in those contracts.                                                                                                                          |
| Market Risk         | <p>Collateral value could drop if backing assets lose value quickly.</p><p>Peg instability if market conditions or liquidity are too volatile.</p>                                                                                 |

These are all factored and modelled when adding strategies to the aggregator and when determining the optimal allocation modelling. \
\ <mark style="color:red;">(add in opsec risks)</mark>&#x20;


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