Risks

Concentrated Liquidity Risk Counterparty Risk

Orphic Finance establishes liquidity positions across multiple concentrated liquidity market makers (CLMMs). This inherently introduces a level of counterparty risk, as the safety and reliability of each CLMM play a crucial role in the performance of our strategies. Ensure that you are comfortable with the risks associated with the underlying CLMM protocols we engage with.

Divergence Loss (Impermanent Loss)

As token prices deviate from their initial value at the time of deposit, the value of your liquidity position may change when compared to simply holding the tokens outside the pool. Large price swings could lead to impermanent loss, where liquidity providers may lose value despite earning fees. The risk of impermanent loss is heightened with concentrated liquidity, as positions are more sensitive to price fluctuations.

Pools consisting of assets that stay within a relatively narrow price range are generally less exposed to impermanent loss. For instance, stablecoins or pegged assets tend to generate less impermanent loss due to lower volatility, though they also offer fewer rewards. Impermanent loss becomes realized when positions are withdrawn or when a strategy is rebalanced. While rebalancing concentrated liquidity can optimize the position for better returns, users should exercise caution and rebalance only when it is expected to yield higher profits.

If the fees earned through swaps surpass the impermanent loss, liquidity providers will enjoy a net positive return. However, the opposite is also true.

Gas Fees

Gas fees can erode overall returns, especially in high-frequency rebalancing strategies. Orphic Finance has been optimized for gas efficiency, but users must still consider the long-term gas costs involved when managing active liquidity strategies.

Manager Risks

Orphic Finance operates permissionless vaults for strategy deployment, allowing anyone to create and manage liquidity strategies. While this opens up diverse opportunities, it also introduces risk, as users must carefully assess the trustworthiness of the strategy manager. Constantly monitor your liquidity positions and ensure the strategy aligns with your goals. Orphic Finance will also offer in-house strategies that undergo rigorous testing, helping to mitigate manager risk. However, users should avoid depositing with unknown or untrusted managers.

Price Volatility Risk

In times of significant price volatility, one or both assets in a liquidity pair may experience rapid price changes, which can lead to your liquidity position temporarily falling out of range. When liquidity is not in an active price range, swap fees are not earned, reducing the overall yield until the position is rebalanced.

Inventory Risk

When providing liquidity, you essentially hold inventory of both assets in the pair. The volatility of either asset will affect your returns. In concentrated liquidity strategies, if the price of one asset decreases relative to the other, you may end up holding more of the underperforming asset. While Orphic Finance's strategies aim to optimize liquidity management, they may not fully protect against downside risks of the individual tokens.