Known Risks & Mitigations

Enzyme Protocol v4 (Sulu) - General Spec
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There are primarily two risk categories (not including griefing) in terms of the behavior of various actors:
Opportunistic investors
Opportunistic managers (including owner, migrator, and asset managers)
Different fund setups will have different levels of trust within and between these parties.
E.g., a DAO treasury might only have a single investor who is ostensibly the same entity as the owner. Or, they might delegate asset management to an EOA that should only be trusted to operate within specific parameters.
E.g., an individual fund owner might be a well-known party for whom reputation serves as a natural mitigation for investors. Or, they might be completely anonymous and untrusted.
In order to not sweepingly apply the strictest risk mitigations to all funds, the protocol is largely unopinionated about what constitutes a "safe" setup, but offers various configuration options and policies to craft bespoke setups that meet particular trust requirements.
Opportunistic investors (arbitrage)
Investors can arbitrage temporarily mispriced shares or mispriced assets held by a fund by depositing and/or redeeming from a fund under opportune conditions.
General mitigations for the below opportunities:
A sharesActionTimelock config option defines the seconds that must pass between a user's most recent deposit and their next transfer or redemption. Though 1 second is enough to prevent flash and sandwich exploits, the longer the sharesActionTimelock, the less of a guarantee that an arbitrage opportunity will remain open at the allowed time of redemption.
Fees can run when depositing or redeeming shares that (conditionally) deduct an amount of shares, thus increasing their effective share price. E.g., for mitigating deposit arbitrage, funds that wish to use an additional arbitrage protection can use the EntranceRateBurnFee , which burns a % of the shares minted during deposit.
Opportunity: mispriced shares due to untracked value during deposit
There may be value that "belongs" to a fund that is not included in its share price, i.e., "untracked assets" in the VaultProxy (e.g., an airdrop) and unclaimed "external rewards" (e.g., accrued COMP rewards) (see "Holdings and Shares").
Extra mitigations:
New assets acquired to the VaultProxy via the protocol are automatically added as tracked assets
Managers should track any untracked assets (e.g., via airdrops or publically-callable rewards claiming functions) as quickly as possible
In the case of accruing external rewards (e.g., COMP), managers are advised to track any reward token that they expect to earn ASAP, e.g., track COMP as soon as you lend or borrow via Compound for the first time.
Opportunity: mispriced shares due to on-chain prices during deposit
Due to the exclusive use of on-chain asset prices, there may be occasions where there is a deviation between on-chain and off-chain values of assets, and thus also share price.
Though the price feeds used in the protocol should be considered manipulation resistant, there are still occasions where prices are updated via transactions and can therefore be frontrun (e.g., Chainlink aggregator price updates). Furthermore, price updates might only occur when deviation thresholds are crossed (i.e., Chainlink aggregators), and even tight thresholds of <1% in a large enough fund could result in significant arbitrage opportunities.
If share price is "too low" (i.e., the total value of assets according to on-chain, internally-used prices is lower than the total value according to canonical prices), then new investors can deposit and essentially receive a discount.
Opportunity: mispriced assets due to on-chain prices during specific asset redemption
Similarly, to the extent that internally-used asset values deviate from their canonical values, the redeemSharesForSpecificAssets() redemption option can be arbitraged, by withdrawing one or more assets that are priced "too low" relative to other assets in the fund.
Though the use of a sharesActionTimelock prevents a user who is yet to hold shares from exercising this arbitrage opportunity, current investors for whom the timelock has expired can redeem at any time.
Extra mitigations:
An exit fee charged only on FeeHook.RedeemSharesForSpecificAssets (i.e., not on in-kind redemption) that burns a % of shares being redeemed.
Opportunistic Managers
In addition to opportunistic actions that intentionally expose a fund to arbitrage (i.e., not following the recommendations above), managers (owners, migrators, and asset managers) can outright steal value from a fund through bad configurations or bad actions with holdings.
This is why it is critical for an investor to assess their own trust threshold for a fund owner (who appoints the migrator and asset manager roles) and whether the fund is configured adequately for that threshold (core configuration, fees, and policies).
A key concept with manager risk mitigation in the protocol is that it is extremely difficult to stop managers from stealing value altogether without overly restricting manager actions. The goal is to slow down the stealing of value in such a manner as to give investors sufficient time to notice (or be notified) and exit a fund as necessary.
It is also important to note that funds can be reconfigured at any time (i.e., new policies, fees, and settings), within the bounds of the reconfiguration timelock.
Opportunity: drain a fund via adapters
It is possible via some adapters to trade in an opportunistic manner that results in value leaking from the fund into external accounts (i.e., to a fund manager).
For example, a multi-hop trade on Uniswap can be routed via an arbitrary intermediary pool in which the manager is the sole LP provider. Similar exploits would be possible through various routes on ParaSwap.
Mitigation: Use a policy that limits share price value loss allowed over a given period, e.g., 5% over 24 hours
Opportunity: hide value in external positions
There is no mechanism for liquidating and forcefully recalling value from external positions. Since external positions live outside of the vault and are not included when redeeming in-kind, a manager can move some or all of the GAV into external positions, effectively shielding it from any attempt to redeem. Once held hostage, the manager could perpetually collect a management fee, hold the assets for ransom, or perform an opportunistic reconfiguration of the fund.
The higher % of GAV that is allowed to live in external positions, the more dangerous to investors.
Mitigations:
completely untrusted funds can exclude the use of external positions entirely via a policy
funds with investors who have more trust or risk tolerance can use a policy that limits the % of GAV allowed across external positions
Opportunity: untrack assets
A manager can untrack any tracked assets in the fund (other than the denomination asset), effectively exposing a shares arbitrage opportunity outlined above.
Mitigations:
use a policy that limits removing tracked assets to negligible amounts
Opportunity: arbitrary fees, policies, and adapters
A manager can use any fees, policies, or adapters by default, which can contain any arbitrary logic, can be secretly upgradable via CREATE2, etc.
Ultimately, investors must trust the setups for funds.
Fee mitigations:
fees can only be added upon fund setup / migration / reconfiguration
Policy mitigations:
policies that restrict users (PolicyHook.RedeemSharesForSpecificAssets and PolicyHook.PreTransferShares ) can only be added upon setup / migration / reconfiguration
Adapter mitigations:
user a policy that only allows Enzyme Council-trusted adapters
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Contents
Opportunistic investors (arbitrage)
Opportunity: mispriced shares due to untracked value during deposit
Opportunity: mispriced shares due to on-chain prices during deposit
Opportunity: mispriced assets due to on-chain prices during specific asset redemption
Opportunistic Managers
Opportunity: drain a fund via adapters
Opportunity: hide value in external positions
Opportunity: untrack assets
Opportunity: arbitrary fees, policies, and adapters