# Risks

Although the [USDN protocol](https://docs.smardex.io/ultimate-synthetic-delta-neutral/glossary#usdn-protocol) is designed to provide a decentralized and stable solution, several risks remain. However, with built-in protection mechanisms, the [USDN token](https://docs.smardex.io/ultimate-synthetic-delta-neutral/glossary#the-usdn-token) is equipped to manage these risks proactively.

## **1.** Smart Contract Risks

Like any decentralized protocol, the USDN protocol relies on [smart contracts](https://docs.smardex.io/ultimate-synthetic-delta-neutral/glossary#smart-contract) to execute its operations. While these contracts are robust, there is always a risk of bugs or vulnerabilities being exploited, leading to financial losses or disruptions in the protocol’s functionality.

#### **Mitigation Measures**:

* USDN’s smart contracts have undergone multiple rigorous security audits conducted by [**Bailsec**](https://bailsec.io/) and [**Guardian**](https://guardianaudits.com/) to ensure their reliability.
* Additionally, a bug bounty program has been implemented to incentivize developers to report potential vulnerabilities, thereby strengthening the protocol’s ongoing protection.

## **2.** Oracle Risks

The USDN protocol depends on [oracles](https://docs.smardex.io/ultimate-synthetic-delta-neutral/glossary#oracle) to obtain accurate prices. If an oracle becomes unavailable, malfunctions, falls out of sync, or is compromised, it could lead to an incorrect valuation of [collaterals](https://docs.smardex.io/ultimate-synthetic-delta-neutral/glossary#collateral), impacting the protocol in various ways.

#### **Mitigation Measures**:

* A redundancy mechanism has been established. As detailed in the section [Providing a Price](https://docs.smardex.io/ultimate-synthetic-delta-neutral/the-usdn-protocol/inside-the-protocol/1.-providing-a-price), if the primary oracle (Pyth) is unavailable, a secondary oracle (Chainlink) is automatically utilized. This ensures continuity and minimizes the risk of disruptions.
* The protocol includes an update mechanism within its oracle section to address situations where one or more oracles become deprecated or unreliable. This mechanism allows the system to switch to accepting prices from an alternative decentralized oracle. Governance retains exclusive authority to define and implement new logic for price retrieval from the updated oracle. Refer to the [Oracle Governance](https://docs.smardex.io/ultimate-synthetic-delta-neutral/governance#id-3.-oracles) section.

## **3.** Risks Associated with the Underlying Protocol (Lido Protocol)

The Lido protocol enables staking of ETH in exchange for stETH, a tokenized version of staked ETH. The [wstETH](https://docs.smardex.io/ultimate-synthetic-delta-neutral/glossary#wsteth-wrapped-staked-ether) (underlying asset), used as collateral in the USDN protocol, depends directly on Lido’s proper functioning. If a flaw or bug is discovered in Lido’s smart contracts, it could compromise the management of staked ETH and weaken trust in the platform. Such a situation could disrupt the availability of wstETH, affecting the stability of USDN’s collateral.

#### **Security Measures Implemented by Lido**:

Lido has implemented several safeguards to minimize risks associated with its smart contracts. These include:

* Independent firms conduct regular audits.
* Open-source code that allows the community to identify vulnerabilities.
* A bug bounty program encouraging proactive discovery of flaws.

These combined measures significantly reduce risks and ensure the reliability of Lido’s contracts. For more information, refer to the [Lido Finance Documentation](https://docs.lido.fi/).