Risks

No yield-generating strategy is risk-free. Anyone who claims otherwise is either uninformed or dishonest. SHRED does not promise to eliminate risk. We promise to identify it, disclose it transparently, and reduce it through deliberate design choices. This page explains the risks you take when depositing into SHRED, what we do to mitigate them, and what residual exposure remains.

Risk Summary

Category	Mitigation	Residual Exposure
Strategy & Yield	Buffer fund absorbs volatility; dynamic target rate adjusts to conditions	Yield depends on market conditions
Infrastructure & Protocol	Battle-tested venues; audited contracts; MPC custody	Third-party failures outside our control
Operational	Multi-party authorization; role separation; fail-safe defaults	Human error remains possible
Liquidity & Withdrawal	TVL caps; liquidity buffers; orderly withdrawal queues	Extreme conditions may delay withdrawals

Strategy & Yield Risk

SHRED generates yield through funding rate arbitrage on perpetual futures, combined with returns from staking and money market lending. This is not a fixed-income product. Returns depend on market conditions.

Risk	Description	How It's Managed
Negative funding rates	If funding rates go negative, the short side costs money instead of earning	Buffer fund absorbs short-term dips; target rate reduced if sustained
Liquidation	Extreme price moves could liquidate leveraged positions on either leg	Liquidation price movement (LPM) monitoring; automatic rebalancing at conservative thresholds
Execution slippage	Rebalancing during volatile conditions may incur unfavorable prices	Threshold-based rebalancing; capital-only adjustments where possible; slippage controls
Under-collateralization	Prolonged underperformance could leave protocol liabilities exceeding assets	Buffer fund reserves; dynamic target rate adjustment; withdrawal fees to prevent cost externalization

How the Buffer Fund Works

The buffer fund is a protocol-level reserve that smooths returns for depositors. When strategy performance exceeds the target rate, excess yield flows into the buffer. When performance falls short, the buffer covers the gap. If market conditions deteriorate for a sustained period and the buffer is strained, we adjust the target rate downward to preserve fund health. If conditions improve, we adjust upward.

In extreme scenarios where adverse conditions persist and the buffer is depleted, the protocol may become undercollateralized relative to outstanding shUSD liabilities. This represents risk to both yield continuity and, in severe cases, depositor principal.

Infrastructure & Protocol Risk

SHRED depends on external infrastructure and deploys its own smart contracts. Any of these systems can fail.

Risk	Description	How It's Managed
Venue failure	Hyperliquid, Ethereum, or Aave could experience exploits, halts, or downtime	Only battle-tested protocols with significant TVL; real-time monitoring; ability to pause and unwind
Bridge risk	USDC transfers between Ethereum and HyperCore rely on bridging infrastructure	Circle CCTP only (burn-and-mint, not liquidity bridge); native USDC only; bridge status monitoring
Smart contract bugs	Vulnerabilities in SHRED vault or shUSD contracts could result in loss of funds	OpenZeppelin primitives; independent third-party audits; minimal contract surface area
USDC depeg	USDC could lose its $1 peg temporarily or permanently	No direct mitigation; risk disclosed transparently; users accept stablecoin counterparty risk
wstETH depeg	wstETH could trade at a discount to ETH, increasing liquidation risk on the long leg	High-quality collateral with deep liquidity; conservative leverage limits

Note on Bridging

The strategy currently uses Circle's CCTP (Cross-Chain Transfer Protocol) to move USDC between Ethereum and HyperCore. CCTP is a burn-and-mint mechanism, meaning USDC is destroyed on the source chain and minted on the destination chain. This avoids the liquidity pool risks of traditional bridges. If the protocol later expands to use HyperCore for spot trading or leverage, reliance on bridging infrastructure would increase.

Operational Risk

Running a yield strategy requires custody infrastructure, execution systems, monitoring services, and administrative controls. Each introduces operational risk.

Risk	Description	How It's Managed
Key compromise	Unauthorized access to custody keys	Fireblocks MPC custody; no single-key control; allowlists restrict fund destinations
Upgrade errors	A bad contract upgrade breaks functionality or introduces vulnerabilities	Multi-party approval required; testing and review before execution
Governance failures	Administrative actions introduce errors or are exploited	Role separation (admin, operator, guardian); controlled upgrade paths
Service downtime	Off-chain monitoring or execution systems go offline	Redundant monitoring across independent services; fail-safe defaults pause rather than force execution; manual override capability

Custodial infrastructure remains a centralized dependency. While MPC eliminates single points of failure for keys, the custody provider itself represents operational risk that cannot be fully decentralized.

Liquidity & Withdrawal Risk

SHRED aims to offer withdrawals without extended lockups. However, the strategy requires position management, and large or concurrent withdrawal requests may require unwinding positions.

Risk	Description	How It's Managed
Withdrawal delays	Large requests may take time to process if positions must be unwound	Liquidity buffers for routine withdrawals; orderly queues for large exits
Market impact	Unwinding positions during stress may move markets against remaining depositors	TVL caps relative to market depth; phased processing of large withdrawals
Cost externalization	Withdrawing users could leave execution costs for remaining depositors to absorb	Dynamic withdrawal fee covers slippage, market impact, and rebalancing costs

Why Withdrawal Fees Exist

When a user withdraws, SHRED may need to unwind positions, incurring real costs: slippage, market impact, gas, and rebalancing. Without a fee, these costs would be absorbed by remaining depositors, effectively subsidizing exits. The withdrawal fee ensures that exiting users bear their own execution costs. The fee is dynamic and may change based on market conditions. Our long-term goal is to minimize this fee as liquidity, integrations, and strategy efficiency improve.

Who Bears What Risk

Clear accountability matters. Here is how risk is distributed:

Risk Type	Borne By
Strategy underperformance (lower yield)	Users
Strategy undercollateralization (principal loss)	Users
Smart contract vulnerabilities	Users (financial), Protocol (reputational)
Venue failures (Ethereum, Aave, Hyperliquid)	Users
Bridge failures (CCTP)	Users
USDC or wstETH depeg	Users
Withdrawal delays	Users (opportunity cost)
Operational errors	Users (financial), Protocol (reputational)

The Bottom Line

Risk management is not a checkbox. It is an ongoing process that evolves as market conditions, infrastructure, and strategy design change.

This page represents our best-faith effort to describe the risks inherent in the system, the mechanisms we use to reduce them, and the trade-offs involved. There is always the possibility that certain risks are not fully identified, that mitigations prove insufficient under unforeseen conditions, or that residual risks are underestimated.

Evaluate SHRED not on the absence of risk, but on how risks are acknowledged, bounded, and actively managed. If you have questions about anything on this page, ask us. Transparency is not a marketing claim. It is how we operate.