# Risks

This section describes the risks associated with USP*,* and the actions taken to mitigate such risks.

<details>

<summary>Stablecoin related risk</summary>

The use of stablecoins such as USDC or USDS introduces additional risks associated with fiat-backed stablecoins. Risks associated with these stablecoins are generally disclosed by the issuer of the token (see [USDC terms](https://docs.pareto.credit/product/usp/www.circle.com/legal/usdc-terms) and [USDS risks](https://docs.sky.money/user-risks)).

Centralized stablecoins provide stability and capital efficiency, but they introduce:

* Unhedgeable custodial risk with bond reserves in regulated bank or trust accounts, which are prone to censorship.
* A critical reliance upon the existing traditional banking infrastructure and country-specific evolving regulations.
* Represent an unsecured credit position to both the issuer and underlying bank holding the reserve assets while mixing these assets with other bank lending activities.

</details>

<details>

<summary>Counterparty risk</summary>

USP generates yield from Credit Vaults that lend funds to TradFi institutions. This introduces a counterparty risk for USP holders given there is a chance that a party fails to meet its obligations, potentially leading to financial losses.&#x20;

To mitigate this risk, USP relies on:

1. Stability fund: 5% of the fees generated by USP are saved in a fund that should cover potential CVs' losses
2. Stakers' deposits: sUSP holders should cover additional losses by having their conversion price to USP reduced to keep the peg for USP stable

</details>


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