Risks of using Arrakis vaults

DISCLAIMER: Engaging with decentralized finance (DeFi) protocols, including Arrakis vaults, carries inherent risks. At Arrakis, we prioritize transparency to help our liquidity providers (LPs) make informed decisions. While we implement robust security measures, users should be aware that DeFi investments may still involve significant risks. The following outlines key risks related to interacting with Arrakis vaults and steps that can be taken to mitigate them.

Smart Contract Risk

Vulnerabilities in Arrakis’s Modular smart contracts (vaults) or the smart contracts of the underlying DEX integrations.

How Arrakis mitigates this risk:

  • Arrakis smart contracts are audited by world class auditing firms (Chainsecurity, Sherlock and Watchpug). You can find the audit repots here.
  • Arrakis only integrates with DEXs/AMMs that have been thoroughly audited and meet our strict audit standards.
  • Arrakis smart contracts undergo extensive testing cycles.

Steps LPs can take:

  • Research Arrakis' security practices and audit history.
  • Consider diversifying across multiple DeFi protocols to spread the risk.

Upgradeability Risk

While upgrades are protected by a 48-hour timelock, an unnoticed malicious or faulty smart contract upgrade could potentially cause significant losses.

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How Arrakis mitigates this risk:

  • Arrakis implements a 48-hour timelock on upgrades and has real-time mempool exploit-monitoring to detect malicious behaviour.
  • Arrakis has implemented real-time mempool exploit-monitoring solutions with emergency hack preventions

Steps LPs can take:

  • Stay informed about proposed upgrades by following Arrakis' official communication channels.

Malicious Manager/Quoter Risk

The off-chain market making system, if misconfigured or compromised, could leak value through MEV (Maximum Extractable Value). While there's an upper bound to value leakage per block, consistent exploitation over time could lead to substantial losses.

How the Arrakis Quoter works

  • The Arrakis Quoter receives requests from solvers looking to fill flow against HOT AMM liquidity on intent-based platforms like CoWSwap, 1inch Fusion and Uniswap X. 
  • The Arrakis Quoter then issues signed quotes to solver requests using up-to-date price sources and state-of-the-art methods to select competitive prices.

How Arrakis mitigates this risk:

  • Arrakis enforces an upper bound to how much value can leaked per block to limit the impact a misconfigured system could have.

Steps LPs can take:

  • Monitor vault performance regularly.
  • Diversify across multiple vaults or strategies to reduce exposure to any single point of failure.

Oracle Risk

A compromised oracle could cause HOT vaults to leak MEV or pause the automated active management of liquidity.

How Arrakis mitigates this risk:

  • Arrakis uses multiple high-quality oracle sources to reduce reliance on any single point of failure.
  • Arrakis systems have safeguards to detect and respond to unusual oracle behavior.

Unhedged Strategy Risk

Exposure to volatile underlying assets means you may have less value in dollar terms than initially invested, even if the strategy has a positive return versus simply holding the assets.

How Arrakis mitigates this risk:

  • Arrakis strategies are designed to achieve neutral to positive returns versus holding, but we do not eliminate market risk. Nor do Arrakis strategies guarantee positive returns versus holding.
  • We provide clear information about each vault's strategy and underlying assets.

Steps LPs can take:

  • Understand the underlying assets and strategy of each vault before depositing funds.
  • Consider your overall portfolio allocation and risk tolerance.

Divergence Loss Risk (Impermanent Ioss)

Impermanent loss occurs when the price ratio of assets in a liquidity pool changes and loss-versus-rebalancing is defined as the cumulative effect of constant rebalancing. This can result in less value compared to simply holding the assets.

How Arrakis mitigates this risk:

  • Arrakis active management strategies aim to reduce and mitigate Loss-Versus-Rebalancing (LVR) as a core feature, improving LP profitability.
  • However, LPs can still be exposed to Loss-Versus-Rebalancing and Impermanent Loss over time.

Steps LPs can take:

  • Understand how loss-versus-rebalancing and impermanent loss works and how it might affect your portfolio.
  • Consider longer-term positions to allow strategies time to potentially overcome short-term loss-versus-rebalancing and impermanent loss.

Volatile Inventory Exposure

While the Arrakis market-making strategy is configured to routinely revisit a 50/50 exposure, the exposure to underlying assets can still fluctuate throughout a trading day.

How the Arrakis liquidity manager works:

  • The Arrakis liquidity manager adjusts the concentrated liquidity range and rebalances inventory towards target exposure by swapping on third-party venues. 
  • This happens at least once every 24 hours, but can occur more frequently. The price range is adjusted based on the moving average of volatility or quickly adjusted if the liquidity position is nearly out of range.

How Arrakis mitigates this risk:

  • The activities of the liquidity manager are off-chain and thus trusted. However, they have strict limits enforced by on-chain oracle checks to prevent outsized damage from misconfigured or malicious activity.

Steps LPs can take:

  • Understand that short-term inventory imbalances are normal and expected.
  • Focus on longer-term performance rather than short-term fluctuations.

User Interface Risk

The Arrakis user interface could potentially experience downtime, be updated to remove features, or even be discontinued.

How Arrakis mitigates this risk:

  • We maintain high uptime standards for our user interface.
  • Smart contracts can be interacted with, in case our UI is unavailable.

Steps LPs can take:

  • Learn how to interact with Arrakis smart contracts directly, if necessary.
  • Keep track of your vault positions and transactions independently of our UI.

Regulatory Risk

The regulatory frameworks applicable to blockchain transactions in connection with tokens and DeFi protocols are still developing and evolving. This could potentially lead to increased regulatory scrutiny or even a regulatory crackdown, which could have negative consequences for participants and the entire DeFi ecosystem.

How Arrakis mitigates this risk:

  • We actively monitor regulatory developments and strive to operate in compliance with applicable laws.

Steps LPs can take:

  • Stay informed about regulatory developments in your jurisdiction.

Conclusion

While Arrakis takes security very seriously and strives to mitigate risks, using DeFi involves inherent risks. We suggest you always do your own research.

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