> For the complete documentation index, see [llms.txt](https://tau-labs.gitbook.io/vault-dashboard/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://tau-labs.gitbook.io/vault-dashboard/tau-risk-framework/types-of-risks.md). # Types of Risks Risk is a general term that can come in different forms. It’s key to differentiate between risk types to understand what is being quantified, what the potential impacts on users are, and how a curator should manage the risk in the vault.
Solvency Risk The most impactful risk is solvency risk. It describes the risk of principal loss, meaning vault depositors get less capital out than they put in. Solvency risk comes from smart contract risk, oracle risk, counterparty risk, and market risk. For instance, solvency risk can be caused by the depeg of a stablecoin a vault lent against as collateral. Solvency risk should be minimized at all costs. That’s what TAU’s risk framework centers around. It measures risk across chains, protocols, assets, and strategies and applies these insights to enforce minimum quality requirements for assets, limit maximum exposure to assets, and allocate capital based on risk-reward calculations. Volatile yield can result in negative APR (e.g. a loop strategy sees increased borrow rates while collateral yield stays constant) which slowly decreases Vault AUM and can lead to losses for depositors. Compared to solvency risk which is characterized by shocks with downward jumps in share value, it accrues linearly over time and can be managed within a strategy. For example, a borrow loop can be delevered. However, some assets (e.g. RWAs with longer redemption periods) restrict swift reaction to negative APYs, and therefore come with added risk.
Liquidity Risk Liquidity risk in vaults results from duration mismatches between reserves and liabilities (vault tokens) and may limit a vault depositor’s ability to withdraw. This can either materialize as a hard limit or a haircut on the immediately withdrawable amount. Vaults need to ensure duration matching of reserves and liabilities. This can be done by introducing withdrawal windows on the vault which allows the curator to take on duration on its reserves. If the vault doesn’t have withdrawal windows, that limits the duration risk it can take on. Reserve assets may become temporarily illiquid, creating liquidity risk in case depositors request withdrawals, for example due to longer redemption windows paired with limited DEX liquidity (e.g. most RWAs, PTs).
> **Solvency risks have to be minimized, liquidity risks need to be managed.** --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## 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, and the optional `goal` query parameter: ``` GET https://tau-labs.gitbook.io/vault-dashboard/tau-risk-framework/types-of-risks.md?ask=&goal= ``` `ask` is the immediate question: it should be specific, self-contained, and written in natural language. `goal` is optional and describes the broader end goal you are ultimately trying to accomplish on behalf of the user. GitBook uses it to tailor the answer towards what is most useful for that goal. 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.