# Risks
DeFi yield is never risk-free. AlphaFi handles the operational complexity for you, but the underlying market and protocol risks are still there. Read this before depositing meaningful capital.
### 1. Impermanent Loss (CLMM Vaults)
#### **What is IL?**
Impermanent loss is the gap between *holding two assets* and *providing them as liquidity*.
When the price ratio of an LP pair moves, the AMM automatically sells the appreciating asset and buys the depreciating one. If you'd just held the two assets, you'd have more of the winner and less of the loser. The difference is IL.
It's called "impermanent" because it reverses if prices return to their starting ratio. But once you withdraw, it's locked in.
IL is highest on volatile pairs (SUI-USDC, WETH-USDC) and almost zero on correlated or pegged pairs (USDC-USDT, stSUI-SUI).
#### **How rebalancing affects IL**
Concentrated liquidity *amplifies* IL compared to a full-range AMM. Narrower ranges mean the position rebalances more aggressively toward the depreciating asset as price moves.
AlphaFi's auto-rebalancing also realizes IL on every rebalance event. When the strategy closes the old position and opens a new one, any IL up to that point becomes permanent.
The tradeoff: rebalancing lets the position keep earning fees in the new range, where a static position would have stopped earning entirely.
#### **IL vs Fees earned**
Whether a CLMM vault is profitable depends on a simple race:
**Trading fees + reward emissions > IL ?**
* *For stable-stable pairs,* fees almost always win. IL is nearly zero.
* For volatile pairs, it depends on volume. High-volume pairs like SUI-USDC usually earn enough fees to beat IL in normal markets. But in fast directional moves, IL can outpace fees for stretches.
This is why most lower-risk users stick to stable-stable LP vaults or single-asset lending vaults.
***
### 2. Smart Contract Risk
Your funds live in AlphaFi's vault and strategy contracts on-chain. A bug there could lead to loss.
**Mitigations:**
* Contracts audited by **MoveBit**, a Move-language security specialist
* Ongoing monitoring by **zeroShadow**, founded by ex-Chainalysis investigators
* Contract addresses and audit reports are public
* Bug Bounty
* Flow Limiters
* Continuous Monitoring by Hypernative
* Continuous AI Auditing
***
### 3. Liquidation Risk
Positions become liquidatable when collateral value drops relative to debt. Rapid market movements can trigger liquidations before users have time to react.
AlphaFi sets conservative loan-to-value ratios and liquidation thresholds for each asset based on its volatility and liquidity profile. These parameters are continuously monitored and adjustable through governance.
***
### 4. Network Risk
Operating on Sui means the protocol is subject to network conditions including congestion, transaction delays, and validator performance.
Users should maintain conservative position health to account for potential delays in executing transactions during periods of high network activity.
***
### 5. Underlying Protocol Risk
When you deposit into an AlphaFi CLMM vault on Cetus, your funds also carry **Cetus** smart-contract risk. Same for Bluefin, Bucket, and every other integrated protocol.
A vulnerability in the underlying — even if AlphaFi's contracts are flawless — can cause loss.
**Mitigation:**\
AlphaFi only integrates protocols with audits, meaningful TVL, and a track record. The risk is real but managed through selectivity.
***
### 6. Depeg Risk (Stablecoin & LST Vaults)
A stablecoin can lose its peg (USDC briefly depegged during the 2023 SVB event). A liquid staking token can drift from its underlying staked asset (stETH in 2022). Vaults holding these would mark down during a depeg.
**Mitigations:**\
AlphaFi favors established, well-collateralized stablecoins (USDC, USDT, USDY) and audited LSTs.
***
### 7. Market & Oracle Risk
Vault yields depend on market conditions outside AlphaFi's control:
* **Volatility** — Bad for IL on CLMM vaults. Affects rebalance frequency and harvest economics.
* **Liquidity** — In stressed markets, the swap path used during harvests or zaps can suffer high slippage.
* **Oracle prices** — Some underlying protocols rely on oracles to compute interest or liquidations. A bad oracle in the underlying can cascade into vault losses.
#### Mitigations
AlphaFi runs several systems alongside the vaults:
* **Bounded Blast Radius:** $250K max per vault or market.
* **Vault caps** — Many vaults cap TVL to limit concentration risk in any single pool. Caps go up as integrations mature.
* **Pause mechanism** — Vaults can be paused in case of an active exploit or contract issue, halting deposits and harvests while keeping withdrawals open.
* **Monitoring** — zeroShadow flags anomalous on-chain behavior in real time.
* **Audits** — All vault and strategy contracts are audited by MoveBit before launch. Major changes go through re-audit.
* **Selective integration** — AlphaFi only integrates protocols that pass internal due diligence: audit status, TVL, age, team reputation.
---
# Agent Instructions: Querying This Documentation
If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question.
Perform an HTTP GET request on the current page URL with the `ask` query parameter:
```
GET https://docs.alphafi.xyz/resources/risks.md?ask=
```
The question should be specific, self-contained, and written in natural language.
The response will contain a direct answer to the question and relevant excerpts and sources from the documentation.
Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.