> For the complete documentation index, see [llms.txt](https://docs.arenas.fi/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.arenas.fi/risks.md).

# Risks

Depositing in Arenas is **not risk-free**. Your pool shares can lose value, and your capital is not always available on demand. Read this page before you deposit.

### Repayment risk

Arenas financing is **undercollateralized**: borrowers post no on-chain collateral, and repayment rests on an off-chain signed financing agreement. A borrower may repay only part of the principal or interest, or nothing at all, and that loss falls on the pool you deposited into.

How it is mitigated:

* **Approval.** Every request is vetted by an approver before any of your capital can be drawn. Even a sound borrower can run into financial trouble later, so this reduces the risk but does not remove it.
* **Senior position.** Your on-chain pool is the senior tranche, repaid before the market's off-chain junior pool. The junior pool is arranged off-chain, so this protection depends on the market's agreements rather than on the contracts. See [Senior and junior pools](/financing-markets.md#senior-and-junior-pools).
* **Off-chain recovery.** If a borrower defaults, the signed financing agreement is enforced off-chain and anything recovered is paid back to the affected pool, but it may be less than what was owed.

### Liquidity risk

Part of every pool is lent out. Withdrawals are two-step and time-locked, and when much of the pool is lent out your withdrawal may be **fulfilled proportionally** or **delayed** until borrowers repay. Don't deposit capital you may need back immediately. See [Withdraw](/financing-markets/withdraw.md).

### Yield risk

There is no fixed APY. Your return depends on how much of the pool is lent out, the rates borrowers pay, and whether they repay. If borrowers default, your return can be **lower than expected or negative**.

### Smart contract risk

Smart contracts can contain bugs or other vulnerabilities, in the protocol code or in the tokens it uses. To mitigate this, Arenas has undergone multiple external third-party professional audits, and plans to run a continuous bug bounty program that rewards external developers for finding and reporting issues.

### Boosted yield risk (CDM only)

If you use the [Credit Delegation Module](/credit-delegation.md), you take on a **leveraged** position on top of the risks above:

* The liquidity borrowed on SomniaLend accrues interest. If the Arenas pool earns less than the borrow rate, the spread turns negative.
* Your SomniaLend collateral stays subject to SomniaLend's **price oracles, health-factor and liquidation rules**. A price move can get your collateral liquidated regardless of how the Arenas pool performs.
* SomniaLend is an external protocol that sets its own parameters and carries its own smart contract risk.