Risks & Mitigations

Potential risks of using the Strata Protocol and the mechanisms in place to mitigate them.

This section highlights the primary risks associated with using the Strata Protocol, the mechanisms designed to mitigate them, and our ongoing commitment to strengthening protocol resilience.

Strata is founded on the principle of balancing risk and yield through transparent, on-chain risk segmentation. By structuring on-chain yields into distinct senior and junior tranches, the protocol allows investors to select exposure aligned with their risk preferences while maintaining capital efficiency across the system.

At its core, Strata is built on the belief that scalable yield starts with scalable risk management. As the protocol evolves, continuous refinement of its mechanisms and underlying yield sources will drive Strata’s mission to democratize access to risk-optimized, sustainable on-chain yields.

Underlying Collateral & Protocol Risk

• Description: Potential insolvency of the underlying protocol or collateral.

• Mitigations:

  • Strata builds on vetted protocols only which have repeatedly proven their solvency and transparency through third-party verified proof of reserves, including during major market drawdowns.

  • In the event of underlying protocol or collateral insolvency, the junior tranche serves as the first-loss capital within the Strata structure.

  • Find out more about the underlying protocol and collateral risks in their respective docs.

Market Risk

• Description: Risk of loss due to underlying yield strategy and APY lower than the benchmark rate

• Mitigations:

  • Senior tranche is principal-protected in the base asset and paid first the share of the yield generated by the protocol based on the Dynamic Yield Split mechanism and any shortfall is covered by the junior tranche. In extreme scenarios (junior TVL ~ 0, underlying APY < benchmark rate), senior APY will be equivalent to the underlying APY.

  • Junior tranche may generate negative yield when the underlying yield falls below the benchmark rate or in the event of a default, resulting in a portion of the junior tranche reserves being allocated to senior tranche to guarantee its floor APY. Junior tranche exchange rate to the underlying base asset continuously rises or falls as the positive/negative yield accrues, and it can fall below 1 and lose the whole principal as well during prolonged negative performance or an underlying default event as it acts as the first-loss capital.

Liquidity Risk

• Description: Risk of significant liquidity outflows from the protocol potentially impacting overall system stability. For instance, large withdrawals from the junior tranche.

• Mitigations:

  • Junior tranche (jrUSDe) redemptions and senior tranche (srUSDe) minting are temporarily suspended when the senior coverage ratio is below 105%.

  • For NUSD and other markets, the junior tranche redemption lockup period increases from zero up to six weeks as the senior coverage ratio decreases. During this lockup period, junior tranche holders remain exposed to junior tranche performance.

  • Coverage is a self-balancing mechanism - the thinner it is, the higher the yield for junior tranche, attracting more liquidity.

Smart Contract Risk

• Description: Vulnerabilities in smart contracts of the underlying protocol, or Strata protocol.

• Mitigations:

  • All Strata Protocol smart contracts are audited by reputable audit firms to ensure the highest level of security on the protocol. and audits are published here.

  • Strata builds only on well-audited smart contracts and integrates with protocols that maintain robust security and risk management standards.

  • Strata uses third-party softwares to monitor our smart contracts 24/7 and to automatically respond to critical incidents.

Operational Security Risk

• Description: Certain protocol functionalities, such as emergency rescue functions, are controlled by permissioned roles, which may become compromised.

• Mitigations:

  • All admin roles and contract ownership are controlled by timelocks, that have the proposer role assigned to ¾ admin multisig and all end-signers are cold wallets.

  • All actions are subject to a 48h timelock except pausing of the protocol and can be cancelled by the Guardian, ensuring strong oversight and protection against misconfiguration or compromise.

  • All multisig & timelock configurations can be accessed here.