> For the complete documentation index, see [llms.txt](https://jpydf.gitbook.io/jpy-defi/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://jpydf.gitbook.io/jpy-defi/risks/risk-disclosure.md). # Risk Disclosure Using JPY DeFi and JPYdf involves the risks below. Please make your own decision with an understanding of these risks. This page is an overview of the main risks and does not cover every risk. ## Smart contracts JPY DeFi runs on smart contracts. Regardless of whether an audit has been performed, unknown vulnerabilities or defects could lead to losses. The audit status is in [Audits & Bug Bounty](/jpy-defi/technical-information/audits-and-bug-bounty.md). ## Liquidation and redistribution If a Trove's collateral ratio falls below the MCR, it becomes subject to liquidation and collateral can be lost. In sharp price moves, liquidation can occur sooner than expected. Debt that the Stability Pool cannot offset is redistributed with collateral to the other Troves in the same branch ([Liquidations](/jpy-defi/borrowing-and-trove-management/liquidations.md)). When a few large Troves hold most of a branch's debt, redistribution from a large liquidation can push recipients' collateral ratios below the MCR and trigger cascading liquidations. A higher redistribution penalty does not guarantee that a cascade will be prevented: the collateral transferred is limited to what remains in the liquidated Trove. If a cascade or price decline takes the branch's total collateral ratio below the SCR, anyone can permanently shut down the branch. Once shut down, it cannot reopen. A cascade can leave the branch's debt concentrated in its last Trove. The last Trove cannot be liquidated and cannot be closed by full repayment before permanent shutdown. After permanent shutdown, it can be closed by repaying all remaining debt, including redistributed debt. ## Redemption Troves with low rates can be redeemed at a time the borrower did not choose. Redemption reduces debt and collateral, so the borrower can miss gains if the collateral price later rises ([Redemptions](/jpy-defi/borrowing-and-trove-management/redemptions.md)). ## Price feeds Collateral valuation depends on external price feeds, and feed delays, anomalies, or outages affect borrowing, liquidation, and redemption ([How Prices Are Determined](/jpy-defi/collateral-and-pricing/oracle.md)). * JPY/USD is shared by all branches. During an outage, normal redemption stops after 30 hours, while borrowing, liquidation, and urgent redemption can use an old price for more than 96 hours. While currency markets are closed, the price is not updated, and redeemed borrowers can lose collateral at an unfavorable price. * dwstETH redemption uses the higher of two prices, so the redeemer can receive less collateral than a calculation at the current market price would give. * If a price source becomes permanently unusable and the governance multisig cannot act for a long time, the price source cannot be changed. During that time, closing a Trove by full repayment and urgent redemption stop, and collateral may be unwithdrawable for a long period. * The emergency procedure can change the price source without comparing old and new prices, so prices after the switch can differ significantly from the previous source or the market. ## External deployment of collateral Deposited collateral can be deployed in external protocols. Venue failures or principal impairment lower collateral backing ([Collateral Strategies](/jpy-defi/collateral-and-pricing/strategies.md)). Losses not visible in a venue's valuation are not reflected in the backing ratio until they are confirmed, so the burden can fall unevenly between users who redeem or claim in the meantime and users who remain. ## Collateral assets and issuers Collateral with an issuer, such as USDC, carries risks of price deviation, freezing, blacklisting, changes to redemption terms, and failures of the issuer, custodian, or reserve assets. wstETH carries risks from Lido's smart contracts and staking operations. If the stETH conversion rate falls, for example because of validator slashing, or if stETH's market price deviates from ETH, the decline is reflected in collateral valuation. WETH locked as gas compensation also carries the technical risks of its wrapper contract. Even though branches are separated, severe collateral impairment can spread to the shared JPYdf. Collateral ratios are calculated in yen. Even if USDC holds at $1, a stronger yen lowers its yen value and can reduce the collateral ratio of USDC Troves and lead to liquidation. ## dToken backing and withdrawals If a dToken's backing ratio falls below 1.0, for example because of a venue loss, collateral value falls and JPYdf's backing can be impaired. While the backing ratio is below 1.0, dToken deposits, in-kind redemptions, and claims are not possible. When converting dTokens back to the underlying asset, you receive the full amount immediately only if the liquidity buffer is sufficient. If it is not, you cannot claim until the buffer is replenished, even after the waiting period, and the timing of receipt is not guaranteed ([dToken](/jpy-defi/collateral-and-pricing/dtoken.md)). ## Peg deviation JPYdf aims to track the value of the Japanese yen with a reference target of ¥1 per JPYdf. Its market price can remain above or below that target; a return to ¥1 is not guaranteed. When it falls below ¥1, redemption tends to move the price back, but that effect depends on fees and collateral exit conditions and weakens temporarily after heavy redemptions because the base rate rises. There is no mechanism, such as a PSM, that instantly supplies JPYdf in exchange for collateral when the price is above ¥1. If demand exceeds available collateral, existing Troves' borrowing capacity, and dToken mint cap headroom, an upward deviation can persist. ## Governance and keys Governance makes configuration changes and upgrades to the proprietary layers. Mitigations such as the 12-hour Timelock exist, but compromised governance keys or operational errors remain risks. Emergency pauses of the collateral layer and confirmation of external-deployment losses can be executed immediately without the Timelock ([Governance & Timelock](/jpy-defi/governance/governance-and-timelock.md)). Cross-chain issuance is not currently active, but once it is enabled, compromise of that authority or its connected systems could affect JPYdf supply and value. ## Network and transactions JPY DeFi is affected by Ethereum mainnet congestion, high gas prices, chain reorganizations (reorgs), and RPC or frontend outages. Displayed prices and transaction previews can change between submission and confirmation, and a failed transaction can still cost gas. ## Regulation and taxation Laws, regulations, and tax treatment relating to crypto assets and stablecoins differ by country, region, and individual circumstances, and may change in the future. Before use, please confirm the applicable laws and tax treatment yourself. ## Disclaimer This documentation is for informational purposes only and does not constitute investment, legal, or tax advice. Use of JPY DeFi and JPYdf is at the user's own risk.