> For the complete documentation index, see [llms.txt](https://docs.btcd.fi/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.btcd.fi/key-risk-factors.md). # Key Risk Factors This section enumerates the material risks faced by users of the protocol. It is not exhaustive — users should consult the audit reports and primary documentation before depositing significant capital. ### Smart Contract Risk All Bitcoin Dollar contracts are independently audited. Audit reports, scope, and remediation status will be linked in Section 10. Bug bounty program details will follow at launch. ### Oracle Risk The protocol depends on price oracles for BTC/USD pricing, ybBTC mark-to-market, and Vault LTV calculation. Oracle failure or manipulation could cause incorrect rebalancing decisions, suboptimal execution, or — in a worst case — liquidations at unfavorable prices. Specific oracle providers (e.g. Chainlink, Pyth, Chronicle) and the redundancy/staleness configurations will be confirmed in the technical reference. ### Counterparty and Custody Risk Bitcoin Dollar operates under a managed-portfolio model similar to Ethena: portfolio assets are held in a combination of on-chain DeFi venues and (where applicable) custodied off-chain. Users should evaluate the custody arrangements and trust assumptions before depositing. The full custody disclosure — including custodian identities, asset segregation, and any off-chain components — will be published prior to launch. ### Liquidation Risk Both vaults take leveraged positions. Although the use of sBTCD as collateral reduces liquidation likelihood relative to using pure BTC or pure USD collateral, liquidation risk is not zero. * USD Vault: liquidation risk concentrates in fast BTC rallies that outpace the vault's deleveraging cycle. * BTC Vault: liquidation risk concentrates in fast BTC drawdowns. Continuous rebalancing through the internal RFQ system is designed to keep LTV close to the 50% target and well below the liquidation threshold under normal conditions, but extreme moves can still trigger liquidation. ### USDC Depeg Risk The portfolio's hedge model assumes USDC has ω = 0 (i.e., trades at $1). A material USDC depeg would invalidate the hedge equation and could cause the portfolio to drift from its 50/50 mandate. The protocol monitors USDC peg stability on an ongoing basis. Mitigations may include diversifying the stable-asset sleeve across multiple stablecoins or short-duration tokenized T-bills. Specific policy to be confirmed. ### ybBTC and Yield Basis Risk ybBTC is a third-party asset issued by the Yield Basis protocol. Risks include: * YB protocol smart contract risk. * Curve Cryptoswap pool depeg or imbalance risk (manifested as TRD). * Capacity limits on ybBTC issuance, which could constrain portfolio growth. BTCD's look-through accounting and omega hedging are designed to absorb routine TRD fluctuations. Catastrophic YB protocol failure remains a tail risk. ### Governance Risk Protocol parameters — vault LTV configuration, portfolio composition limits, fee switches, oracle configuration — are governed by FISC. Governance attack risk, multisig structure, timelocks, and upgrade procedures will be detailed in the governance specification. ### Cross-chain and Bridge Risk The protocol launches on Ethereum. Cross-chain deposit support (via LI.FI, Circle CCTP, and similar) inherits the security properties of the underlying bridges. Each integration's security properties will be documented as it goes live.