Aug 15, 2025
As investors explore new opportunities in digital assets, yield strategies have become an important focus. While traditional stablecoin yields offer safety, they often come with limited upside. On the other hand, DeFi yield farming and speculative tokens can provide higher returns but expose investors to extreme volatility and risk.
This is where Liquid Yield Tokens (LYTs) like SIERRA step in.
Sierra is a LYT designed for investors who want stable, risk-adjusted returns without going “full degen,” combining Real-World Assets (RWAs) and DeFi yields with active risk management.
In this article, we’ll break down the types of risks associated with yield strategies, explain how Sierra mitigates them, and show how its framework compares to other yield-generating options.
What are Liquid Yield Tokens (LYTs)?
A Liquid Yield Token (LYT) is a digital token that offers yield to holders, where the yield is derived from income-generating assets that serve as the reserve collateral backing the token.
Unlike traditional staking or yield farming where assets are locked in smart contracts, LYTs maintain secondary market liquidity, allowing holders to trade or redeem the LYTs without temporarily locking up their capital.
However, both issuers and users face a range of risks that must be understood to manage exposure effectively. That’s why it’s worth taking a closer look at how Sierra breaks these risks down and what makes its approach different from the rest.
Sierra’s Risk Framework and How It Works
SIERRA blends RWA and DeFi yields overlaid with active risk management and dynamic rebalancing, offering a unique and balanced option in the evolving crypto landscape and market conditions. This means:
The SIERRA offers:
Higher returns than stablecoins like USDT and USDC.
Lower volatility and risk than typical DeFi yield farming, altcoins, or memecoins.
Dynamic risk management, including monthly reviews and portfolio rebalancing.
By overlaying active monitoring and diversification, Sierra creates a balanced investment vehicle for investors seeking both safety and growth.
Here’s how SIERRA compares to other popular yield-generating assets across risk and return:
Key Risks in Yield Strategies
The table below outlines 10 core risk categories, their descriptions, and their relative weights which essentially reflects the relative impact of each risk type within Sierra’s framework.
While higher weights indicate risks that carry more influence when scoring a yield source, lower weights, on the other hand, suggest risks that are less significant but still monitored.
By applying these weights, SIERRA can adjust yields to account for the true level of risk to ensure investors are seeing risk-adjusted returns.
Risk Types | Description | Weight |
Duration Risk | Risk that changes in interest rates affect the value of collateral. For example, as duration risk increases, rising interest rates can negatively impact the value of the reserves. | 1.0040 |
Credit Risk | Risk that the lending counterparty or the issuer of bonds, debt, or other reserve assets defaults on interest payments or fails to meet overall debt obligations. | 1.0040 |
Liquidity Risk | Risk that Sierra will incur costs through slippage, fees, penalties, or other related expenses when disposing of reserve assets to meet redemption requests. | 1.0020 |
Term Risk | Risk that Sierra may not be able to meet all redemption obligations because a reserve asset is completely illiquid until its term expires. | 1.0040 |
Currency Risk | Risk that reserve assets denominated in a currency other than USD (Sierra’s base currency) lose value if the foreign currency depreciates against USD. | 1.0000 |
Yield Volatility Risk | Risk that the yield for reserve assets, particularly floating-yield assets, may change significantly over time. | 1.0000 |
Smart Contract Risk | Risk that bugs or vulnerabilities in the underlying smart contracts for DeFi yield sources result in partial or full loss of reserve assets. | 1.0040 |
Exploit Risk | Risk that a DeFi yield source is used in an unintended way, leading to partial or full loss of reserve assets | 1.0040 |
Financial Crime Risk | Risk that high-risk entities (e.g., North Korea, darknet users, sanctioned wallets) access a DeFi yield source where Sierra has reserve assets, as identified through AML analytics platforms like Chainalysis. | 1.0020 |
Regulatory Risk | Risk that regulators take legal or enforcement action against one of the DeFi yield sources in which Sierra has reserve assets deployed. | 1.0020 |
Correlation Risk | Risk that problems with one yield source could trigger issues in another, making losses more likely to happen together | 1.0020 |
How Sierra Applies This Risk Framework
Each yield source Sierra invests in is evaluated against these risks, scored accordingly, and adjusted through a discounting methodology. This produces risk-adjusted yields that allow for fair comparisons across different strategies.
For example:
Uncollateralised lending is scored higher on credit risk than overcollateralised lending or U.S. Treasury money market funds.
Smart contract-heavy strategies are given stricter weightings due to potential vulnerabilities.
Additionally, SIERRA's advisory board continually monitors yield sources for residual risks that are not captured in any of these categories. Furthermore, the Risk Framework is reviewed and updated as needed on a monthly basis to ensure risk monitoring and assessments evolve in line with changing market conditions and new technological innovations.
Lastly, each yield source is assigned a Maximum Portfolio Allocation, which limits the amount of SIERRA's reserves that can be deployed into a given yield source. This extra layer of risk management ensures that SIERRA's portfolio does not become too overweight higher risk yield sources.
Conclusion
SIERRA offers a smart middle ground in a market of extremes. By combining real-world and DeFi yields with active risk management, it gives investors a way to earn returns while keeping liquidity.
With careful monitoring and diversification, SIERRA helps investors understand and navigate the risks behind different yield strategies.