Protocols governed by token holders or small founding teams may undergo sudden or biased changes in critical parameters (e.g., interest rates, incentive structures, or smart contract upgrades). If governance power is concentrated in a few wallets or lacks transparency, there’s a heightened risk of collusion, misalignment with community interests, or protocol forks that may disadvantage minority stakeholders.

Oracles bridge the blockchain with real-world data (e.g., asset prices). If an oracle is manipulated, delayed, or inaccurate, it may trigger faulty liquidations, misprice collateral, or result in wrong execution of smart contracts. This is especially critical in lending protocols, stablecoins, and any system requiring real-time external inputs. Dependency on a single source or insecure data aggregation increases systemic fragility.

Assets different to stablecoins, are inherently volatile. Sharp price movements may cause sudden losses, margin calls, or collateral shortfalls. Assets that appear uncorrelated may move in tandem during liquidity crunches. Strategies not dynamically adjusted for volatility may experience amplified drawdowns. Volatility also affects hedging costs and the predictability of yield generation.

Jurisdictions vary widely in their treatment of digital assets. Regulatory action—including bans, restrictions, or retroactive enforcement—may impact protocol operations or token utility. Tokens or protocols may be delisted, frozen, or face legal scrutiny, making them unviable. This risk is elevated in assets with unclear legal classification or where founders and infrastructure are located in unstable regions.

Cross-chain bridges facilitate asset transfers between blockchains but are often the weakest security point in DeFi. They involve multiple validators or relayers and complex verification schemes, which if compromised can lead to total asset loss. Past incidents have shown that even well-known bridges have been vulnerable to sophisticated attacks. Downtime, delays, or misconfiguration can also expose capital.

Improper storage or management of private keys can result in permanent loss of access to assets. Risks include phishing, hardware failure, human error, or unauthorized access. In institutional environments, poor key governance can lead to theft or mismanagement. Multisig setups reduce single points of failure but must be implemented with operational discipline and secure backups.

Redemption pressure can exceed the liquid capacity of the underlying assets, especially in stressed markets. If investors request redemptions faster than assets can be unwound, forced liquidation at unfavorable prices or redemption delays may occur. Maturity mismatches between fund structure and asset profiles amplify this risk.

Accurately pricing digital assets—especially those in illiquid, off-chain, or long-tail segments—can be difficult. Using outdated, manipulated, or limited price data can distort NAV calculations, misinform investors, and impair decision-making. Illiquid holdings present a particular challenge, often requiring model-based assumptions that may not reflect true market value.

Lack of clarity in fee calculation—especially for performance-based incentives—can misalign manager and investor interests, erode trust, and lead to disputes. Ambiguities in High Water Marks, Hurdle Rates, or performance benchmarks can skew reported results or incentivize excessive risk-taking.

Inadequate internal controls may lead to breaches of the fund's investment mandate, overexposure to specific assets, or deviation from strategic goals. Lack of oversight, unclear approval procedures, or conflicts of interest may compromise the integrity of portfolio management.

Manual actions, lack of process standardization, or key-person dependencies can result in execution mistakes or oversights. Additionally, unauthorized internal activity—such as data leakage, collusion, or fraud—poses a risk if not mitigated by appropriate governance structures and access controls.

Technical failure, cyberattacks, or catastrophic events (e.g., power outages, data center failure) may interrupt fund operations. A lack of redundancy in systems or secure off-site backups increases the risk of irreversible data loss or prolonged downtime during crises