# Security & Risk Considerations

xTokens bring convenience and composability, but like any DeFi product they also involve risks. Here are the main aspects to keep in mind:

* **Smart Contract Risk:** Tokenized strategies run on audited contracts that handle minting, burning, and accounting of xTokens. Audits have been conducted by reputable firms, including Pashov Audit Group and Spearbit. Reviews and ongoing monitoring strengthen security; however, no on-chain contract is completely risk-free. Audit reports are available [here](https://docs.liminal.money/more/audits).
* **Oracle Risk:** Token underlying value relies on oracles to update NAV. These oracles are secured using institutional-grade custody with multi-sig protections and independent third-party guardians, making compromise extremely unlikely. xTokens also rely on Pyth’s price feeds, and the smart-contract oracle logic is covered by independent security audits.
* **Custodial Risk:** Underlying assets (USDC, spot, perps) are secured with institutional-grade custody: multisig, strict controls, and institutional-grade custodians.
* **Redemption Liquidity:** In normal conditions, redemptions are smooth. In extreme cases (e.g. large withdrawals or sudden market stress), redemptions may involve delays, fees, or temporary pauses to protect the strategy. Liminal also maintains liquidity buffers to handle Instant Redemptions.
* **Market Risk (Residual):** xTokens are designed to be delta-neutral and aim to provide predictable performance that reflects the underlying strategy. For asset-based xTokens, funding rates are a key driver of performance. Performance can also benefit from additional yield sources on the spot side, such as LSTs. In extreme scenarios, such as prolonged negative funding or when costs exceed returns, NAV may temporarily decline. For lending-based xTokens such as xLEND, the lending rate is the key driver. Lending rates cannot turn negative by construction, but they can compress toward zero in low-demand environments, reducing yield without putting NAV at risk.xTokens are built for steady and representative growth, but performance is not guaranteed.
* **Hyperliquid Dependency:** Strategies rely on Hyperliquid’s markets. Issues such as downtime or halted trading could temporarily prevent yield accrual or rebalancing. While unlikely, this dependency is inherent to both Tokenized and Customized products.

Tokenized strategies inherit Liminal’s core safety features. They use low leverage with actively managed hedges to minimize risk. Positions are rebalanced proactively to prevent liquidations. The value of each strategy is transparent on-chain, with collateral and debt visible in real time. Every xToken is fully collateralized by underlying assets, ensuring stablecoin redemptions at NAV under normal conditions.

**Summary:**

xTokens introduce additional considerations, smart contracts, pooled execution, and oracle reliance, but they are built with strong safeguards. xTokens are dynamic assets whose value changes based on strategy performance, they are not pegged stablecoins. Always review the latest documentation for details on each xToken, including fees and parameters.