Risk Disclaimer
Providing liquidity on YieldBasis and participating in leveraged liquidity provision comes with inherent risks. Before making a deposit or engaging with the protocol, users must research and understand the risks involved. This document outlines the primary risk categories associated with YieldBasis.
Audits & Documentation
YieldBasis smart contracts have undergone multiple comprehensive security audits by reputable firms including Statemind, Chainsecurity, Quantstamp, Mixbytes, Electisec, and Pashov to enhance protocol security. Additionally, YieldBasis has conducted a security contest with Sherlock. All identified issues from these audits have been remediated. Audit reports are available at: https://docs.yieldbasis.com/security/audits-bug-bounties
Technology Risk
Smart Contract Risk
YieldBasis relies on smart contracts, which are self-executing pieces of code. While these contracts are designed to be secure, there is a risk that they may contain vulnerabilities or bugs. Malicious actors could exploit these vulnerabilities, resulting in the loss of funds or other adverse consequences. It is essential for users to conduct due diligence and review the smart contracts and security audit reports to assess the inherent risks.
YieldBasis smart contracts have undergone multiple audits by reputable firms including Statemind, ChainSecurity, QuantStamp, MixBytes, Electisec, Pashov and an audit competition hosted by Sherlock. While smart contract audits play an important role in good security practices to mitigate user risks, they don't eliminate all risks. Users should always exercise caution regardless of YieldBasis's commitment to protocol security.
Oracle Risk and Price Feed Dependency
YieldBasis relies on price oracles to determine the value of LP tokens and maintain proper leverage ratios. The protocol uses a sophisticated oracle system that combines Curve cryptopool LP pricing with a crvUSD price aggregator that samples from multiple major liquidity pools. The oracle validates that crvUSD prices remain within reasonable bounds (between 1.10) to prevent manipulation. However, oracle systems are not infallible. In extreme market conditions, oracle price feeds may experience latency, temporary unavailability, or inaccuracies. While the protocol employs crvUSD price normalization across multiple liquidity sources to enhance reliability, sudden and significant price discrepancies between oracle feeds and actual market prices could impact the protocol's ability to accurately maintain leverage ratios. Users should be aware that oracle failures or manipulation attempts, though mitigated through design, could potentially result in unfavorable trade execution, incorrect collateralization ratios, or temporary system instability.
Leverage Mechanism and Rebalancing Risk
YieldBasis maintains a constant 2x compounding leverage ratio through an automated rebalancing mechanism that relies on arbitrageurs to restore optimal leverage when asset prices move. This rebalancing process depends on economic incentives created by the Rebalancing AMM and Virtual Pool contracts. Under normal market conditions, arbitrageurs are incentivized to execute rebalancing trades that maintain the target 50% debt-to-value ratio. However, during periods of extreme market volatility or network congestion, rebalancing may be delayed or temporarily disrupted. High gas costs on the Ethereum network can make rebalancing trades economically unviable for arbitrageurs, potentially causing the protocol to operate outside its target leverage range for extended periods. Additionally, if crvUSD experiences significant price deviations from its $1.00 peg, the effective leverage ratio may temporarily deviate from the target. While the protocol is designed to self-correct through arbitrage opportunities, users should understand that leverage maintenance is not instantaneous and depends on market participants responding to economic incentives.
Spread Fluctuations and Withdrawal Variability
Users may observe that withdrawal amounts can fluctuate between blocks and transaction execution. This phenomenon occurs because YieldBasis dynamically adjusts pricing spreads in the Rebalancing AMM based on the current debt-to-value ratio. When the protocol's leverage drifts from the target 50% ratio due to asset price movements, the AMM automatically widens or narrows spreads to incentivize rebalancing. As a result, the amount of assets a user receives when withdrawing can vary slightly depending on the exact moment of transaction execution and the current state of the protocol's leverage. During periods of rapid price movement, these spread adjustments can be more pronounced. Users should carefully review transaction previews before confirming withdrawals and consider setting appropriate minimum output parameters to protect against unfavorable execution due to spread fluctuations. This variability is an inherent feature of the constant leverage mechanism and reflects the protocol's real-time adjustment to maintain system stability.
Immutability and Irreversibility of Transactions
When you engage in transactions on Ethereum or EVM-compatible blockchains, it is important to understand that these transactions are immutable and irreversible. Once a transaction is confirmed and recorded on the blockchain, it cannot be modified, reversed, or deleted. This means that if a user sends funds to an incorrect address or engage in a fraudulent transaction, it may not be possible to recover the funds. It is crucial to exercise caution, verify transaction details, and use secure wallets to minimize the risk of irreversible transactions.
Counterparty Risk
Access Control
YieldBasis smart contracts are intentionally designed to be immutable and noncustodial, meaning they cannot be upgraded and liquidity providers always retain full control of their funds. While this characteristic may limit protective actions in case of emergencies, it significantly strengthens user assurances about custody of their funds.
The YieldBasis protocol is governed by a Decentralized Autonomous Organization (DAO) comprised of veYB tokenholders that requires a 1-week vote period with 55% approval and a 30% voter quorum to execute any actions. It controls critical system functions, including the implementation of new system contracts and the adjustment of system parameters.
Emergency Procedures
YieldBasis does not implement traditional emergency pause functions or circuit breakers at the protocol level. This design choice prioritizes user custody and control, ensuring that liquidity providers can always access their funds regardless of protocol state. However, since YieldBasis markets are built on top of Curve Finance pools, the Curve Emergency DAO maintains the ability to pause the underlying Curve pools in extreme emergency situations. If a Curve pool is paused by the Curve Emergency DAO, this may affect swap functionality, but importantly, withdrawals from YieldBasis remain possible even if the underlying Curve pool is paused. Users should be aware of this dependency relationship and understand that while YieldBasis itself cannot be paused by any party, the underlying Curve infrastructure includes emergency safeguards that could temporarily affect certain protocol functions while preserving withdrawal capabilities.
Dependency on Curve Finance Infrastructure
YieldBasis is fundamentally built on top of Curve Finance's cryptoswap pools and relies on these pools for core functionality including liquidity provision, LP token pricing, and the underlying AMM mechanics. Any vulnerabilities, exploits, or failures in Curve Finance contracts could directly impact YieldBasis users. Additionally, YieldBasis uses Curve's "refueling" mechanism to maintain optimal pool depth and benefits from Curve's battle-tested oracle and pricing systems. While Curve Finance has an extensive security track record with multiple audits and years of production usage, users should understand that YieldBasis inherits both the benefits and risks of this dependency. Changes to Curve pool parameters, upgrades to Curve contracts, or issues with Curve infrastructure could affect YieldBasis markets without direct control by YieldBasis governance.
Asset Risk
BTC Wrapper Token Risk
YieldBasis supports multiple wrapped Bitcoin tokens including cbBTC, WBTC, and tBTC across different markets. Each wrapped BTC token represents Bitcoin held by different custodians or bridge mechanisms, and each carries its own specific risks. Users should understand that wrapped BTC tokens are not native Bitcoin and depend on the security, solvency, and operational integrity of their respective issuers or bridge protocols. If a wrapped BTC token loses its peg to Bitcoin due to custodian insolvency, bridge exploit, regulatory action, or technical failure, liquidity providers holding that specific yb-BTC token will experience corresponding losses. Markets on YieldBasis are isolated from each other, meaning issues with one wrapped BTC variant will not directly affect other markets, but users should carefully evaluate the trust assumptions and risks associated with their chosen BTC wrapper before depositing.
crvUSD Stability and Peg Risk
YieldBasis borrows crvUSD through a dedicated collateralized debt position (CDP) line to achieve 2x leverage. The protocol's leverage mechanism assumes that crvUSD maintains approximate parity with the US dollar. While crvUSD is designed as a decentralized stablecoin with robust collateralization and has mechanisms to maintain its peg, there is no guarantee that crvUSD will always trade at exactly 1.00, this can temporarily affect the protocol's effective leverage ratio and the value of user positions. The protocol's oracle system validates that crvUSD prices remain within a reasonable range, but short-term price volatility in crvUSD markets could still impact users. In a scenario where crvUSD permanently loses its peg due to systemic issues with its collateral or redemption mechanisms, YieldBasis users would face losses proportional to the severity and direction of the depeg, as the protocol's debt is denominated in crvUSD.
Market Dynamics and Liquidity Risks
The value of user positions in YieldBasis is affected by overall market dynamics including price volatility, liquidity fluctuations in underlying Curve pools, trading volumes, and broader economic factors. Bitcoin and other cryptocurrencies have historically exhibited significant price volatility, experiencing rapid and substantial fluctuations in value within short time periods. While YieldBasis is designed to provide 1:1 BTC exposure through its 2x leverage mechanism and eliminate impermanent loss relative to holding BTC, users are still fully exposed to Bitcoin's price movements in both directions. Sudden market movements, flash crashes, rapid price increases, or unexpected events can result in substantial gains or losses. Additionally, the efficiency of the protocol's rebalancing mechanism depends on sufficient arbitrage activity and adequate liquidity depth in the underlying Curve pools. In low liquidity environments or during periods of extreme market stress, rebalancing may be slower or less efficient, potentially causing temporary deviations from target leverage ratios.
Flash Loan Dependency
YieldBasis's rebalancing mechanism relies on flash loans to enable capital-efficient arbitrage that maintains proper leverage ratios. The Virtual Pool contract integrates with flash loan providers to allow arbitrageurs to execute large rebalancing trades without requiring significant upfront capital. This dependency means that if flash loan infrastructure becomes unavailable, experiences technical issues, or significantly increases fees, the protocol's ability to quickly rebalance could be impaired. While flash loan protocols have proven reliable over time, any disruption to flash loan availability could delay the protocol's return to optimal leverage during volatile market conditions.
Disclaimer
The information provided within this document does not constitute financial, legal, or tax advice personalized to individual circumstances. The content presented is for informational purposes only and should not be relied upon as a substitute for professional advice tailored to specific needs. The protocol is provided "as is" without warranties of any kind, and users engage with YieldBasis entirely at their own risk. It is strongly recommended that users seek the advice of qualified professionals regarding financial, legal, and tax matters before engaging in any activities on YieldBasis. Past performance is not indicative of future results, and users may lose some or all of their deposited capital. Users should only deposit funds they can afford to lose and should carefully consider their risk tolerance, financial situation, and investment objectives before participating in leveraged liquidity provision.