Automated Crypto Yield Strategies: Understanding the Hidden Risks

Automated crypto yield strategies have made DeFi easier to use by managing deposits, rebalancing, and reward harvesting without manual trades. However, this convenience comes with several layers of risk that users may not see in the interface.

One such incident occurred on July 6, when attackers drained $6.04 million from two USDC vaults in Summer.fi's Lazy Summer Protocol. The incident was later found to be an operational/offboarding failure in how the protocol accounted for certain assets in the share price.

The risks associated with automated yield strategies include smart-contract and composability risk, where a single vault may interact with several underlying protocols that can have vulnerabilities. This means a vulnerability in one part of the system can affect the entire strategy.

Another risk is liquidation and leverage risk, where automation does not protect a strategy from market movements. Many automated strategies use borrowed funds to amplify returns, which increases both gains and losses and introduces liquidation risk when collateral values drop.