> For the complete documentation index, see [llms.txt](https://superearn-1.gitbook.io/superearn/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://superearn-1.gitbook.io/superearn/product/risk-framework/vault-risk-framework.md).

# Vault Risk Framework

## USDT Vault Risk Assessment Framework

### Objective

To develop a risk assessment framework for USDT-based vaults operating within SuperEarn

This framework assumes that all invested assets are stablecoin-based, meaning delta-exposed positions (e.g., long/short token price exposure) are **not considered**.

***

### 1. Liquidity Concentration

#### Definition

The risk increases if our deposited liquidity represents a large share of the pool. This can lead to:

* Exposure to **insolvency** risk
* **Yield distortion** caused by our own capital

#### Evaluation Criteria

* If our liquidity is **under 10%** of the total pool: negligible risk
* **10–20%**: monitor potential yield influence
* **Over 20%**: high influence on pool stability and profitability

#### Example Rating Table

| Risk Level | Liquidity Ratio (Our Liquidity / Pool Liquidity) |
| ---------- | ------------------------------------------------ |
| Low        | < 10%                                            |
| Medium     | 10–20%                                           |
| High       | > 20%                                            |

***

### 2. Insolvency Risk

#### Definition

The potential for **principal loss** due to depegging, liquidity shortage, or asset failure. Risk depends on:

* Asset type
* Pool structure

#### Evaluation Criteria

* **Lending Pools:** Major stablecoins (e.g., USDC/USDT) = low risk; others = medium-high. Utilization Rate (UR) should be <90%.
* **Other Single Pools (e.g., RWA):** Risk tied to underlying asset (e.g., T-bills = low, real estate = case-by-case).
* **Stable-Stable LPs:** Balanced token ratios = low risk; skewed pools = increased risk.

#### Example Rating Table

| Pool Type             | Insolvency Risk Level                                                                                                             |
| --------------------- | --------------------------------------------------------------------------------------------------------------------------------- |
| Lending (Single Pool) | <p>Directly issued USDC/USDT: Low<br>Other stablecoins (e.g. bridged): Medium<br>- UR > 90%: Increase risk by 1 level</p>         |
| Lending (Single Pool) | <p>T-bill based RWA: Low<br>Other assets: Case-by-case evaluation</p>                                                             |
| Stable-Stable Pair LP | <p>Directly issued USDC/USDT: Low<br>Other stablecoins (e.g. bridged): Medium<br>- If highly skewed: Increase risk by 1 level</p> |

***

### 3. Leverage Exposure

#### Definition

Assesses the extent of leverage used in the vault and the stability of the collateralized/borrowed assets.

#### Evaluation Criteria

* Leverage up to **2x** = low risk
* **2–4x** = moderate risk (low if collateral is high-quality stablecoin)
* **Over 4x** = high risk (moderate if collateral is robust)

#### Example Rating Table

| Leverage Ratio | Leverage Risk Level                                       |
| -------------- | --------------------------------------------------------- |
| ≤ 2x           | Low                                                       |
| 2–4x           | Medium (if collateral is directly issued USDC/USDT: Low)  |
| > 4x           | High (if collateral is directly issued USDC/USDT: Medium) |

***

### 4. Yield Source Quality

#### Definition

Evaluates how **sustainable** and **predictable** the vault’s yield source is.

#### Evaluation Criteria

* **Fixed yield** (e.g., Pendle PT) = low risk
* **Variable yield** (lending, DEX) = moderate
* **Incentive-based yield** = high risk

#### Example Rating Table

| Yield Source                  | Risk Level |
| ----------------------------- | ---------- |
| Fixed Yield (e.g. Pendle PT)  | Low        |
| Variable Yield (Lending, DEX) | Medium     |
| Temporary Yield (Incentives)  | High       |

***

### 5. Protocol Risk

#### Definition

Evaluates the security and reputation of the protocol managing the vault.

#### Evaluation Criteria

* **Well-audited with no recent incidents** = low risk
* **Lack of audit or history of issues** = medium-high risk
* **Lending protocols with overly aggressive parameters** = raise risk by one level

#### Example Rating Table

| Audit & Incident History                     | Protocol Risk Level      |
| -------------------------------------------- | ------------------------ |
| Proper audit & no major issues in past year  | Low                      |
| No proper audit or recent security issues    | Medium–High              |
| Lending Protocols with Aggressive Parameters | Increase risk by 1 level |