A vault is high risk when its TVL is a large % of the pool TVL as measured by Vault/Pool, or if the pool's TVL is low.
These vaults have an increased risk of market manipulation and adverse selection, both of which can lower its returns. High risk vaults will be clearly indicated on the front-end before every deposit.
If you want to use high risk vaults to manage liquidity, please contact Charm for further assistance at [email protected].
Unexpected price volatility
If there is unexpected price volatility, the vault's liquidity may become Out Of Range. The Liquidity may be worse than a Full-Range Position, and will only improve if the price moves back into range.
If projects are uncertain how the vault's tokens will trade, they can:
Set a larger Full-Range Weight, so that there is still Liquidity if trading takes place Out Of Range.
Projects can update the parameters at any time. For example, if the volatility is lower, they can increase Fee Income or Capital Efficiency by choosing a narrow-range strategy, or by decreasing the value of Full-Range Weight.
To help projects chose parameters, Alpha Vaults' front-end will summarise what a vault will do before and after it's created.
Infrequent Rebalancing
Anyone* can Rebalance the vault, but if no one triggers rebalance, the vault's Liquidity Positions will not be updated as the price changes. The means the vault is more likely to underperform.
To automate rebalancing, projects can use an automation solution (eg Gelato Automate), incentivise their community to trigger rebalance, or use a keeper script to trigger rebalance themselves.
*Vault Manager can turn this off so that only whitelisted addresses can call rebalance.
Price manipulation
Price manipulation occurs when attackers use large amounts of capital to swap tokens, in order to manipulate the price within a pool. If other protocols (eg lending protocols) use the pool's price as the oracle, value can be extracted from the protocol when the pool price is temporarily manipulated.
Research shows price manipulation is less likely if there is a Full Range Position and therefore, projects may wish to have a larger % of liquidity in full-range if their vault is managing most of the liquidity within a pool.
To protection against price manipulation, managers can do a TWAP check for every vault. By default, a TWAP check is performed for every vault created using Charm's front-end. Managers may want to change the TWAP parameters to offer more security, but this will be at the risk of users not able to deposit or rebalance. It is NOT recommended to set a very low value for the TWAP duration, or a high value for the TWAP deviation, as the vault will be more vulnerable to price manipulation during deposits and rebalance.
