Risk Disclosures

We believe in being straightforward about risk. Depositing assets into any DeFi protocol involves real risk, and Kerne is no exception. Please read this section carefully.

General Risk Statement

Nothing on the Kerne website, in this documentation, or in any communication from Kerne Protocol constitutes financial, investment, legal, or tax advice. Kerne Protocol does not hold any financial services license or registration. You are solely responsible for your own investment decisions.

Specific Risks

• Smart contract risk: The contracts are audited by Hexens (final report published 31 July 2026) and reviewed internally, with adversarial audit reports published. Smart contracts may still contain undiscovered vulnerabilities that could result in loss of funds.
• Exchange counterparty risk: The hedging engine maintains positions on external venues. If a venue experiences a failure, hack, or insolvency, hedge positions on that venue could be lost. Today the hedge runs on a single venue, Hyperliquid; multi venue routing and concentration limits are designed to reduce this risk as venues are added, but it cannot be fully eliminated.
• Oracle risk: Price feed errors or manipulation could cause the protocol to make incorrect hedging decisions. The PSM reads Chainlink's USDC/USD feed with a staleness check and a depeg gate, and a dual feed router (Pyth plus Chainlink) is deployed; these mitigate but do not eliminate this risk.
• Negative funding rate risk: Extended periods of negative funding rates reduce or eliminate the funding rate component of yield. In extreme cases, negative funding could temporarily exceed staking yield, resulting in a net negative return for that period. Negative funding is settled hourly against the margin balance in the hedging venue account, which is protocol capital. Who bears that loss, in what order, and what is behind it, is set out under Loss Allocation below.
• Ethereum validator slashing risk: If the underlying LST protocol experiences a slashing event, the value of deposited collateral could decrease.
• kUSD depeg risk: The peg is supported by redeemability rather than by secondary market depth: kUSD mints and redeems one for one, less the fee, against USDC through the PSMs, and the USDC reserve behind outstanding kUSD is published hourly as a signed statement at kerne.fi/api/por/signed. The Insurance Fund is a designed second line and holds a zero balance today. Extreme market conditions could cause kUSD to trade below $1.00 temporarily or permanently.
• Regulatory risk: Changes in regulation could affect the protocol's ability to operate or users' ability to access it.
• Liquidity risk: During extreme market conditions, withdrawal processing may take longer than normal as the hedging engine unwinds positions in an orderly manner.

Loss Allocation: Who Bears a Negative Funding Loss

A delta neutral basis position earns funding while shorts are paid by longs, and pays it when that inverts. Stating the effect on yield is not the same as stating who absorbs the loss, so this section states the second thing. Every balance named here is published in the hourly signed attestation at kerne.fi/api/por/signed and is independently readable on chain.

In order, negative funding is absorbed by:

1. The margin balance in the hedging venue account. Funding settles hourly against the account holding the short. That balance is protocol capital, not user deposits. It is the account listed with role venue_margin in the signed registry at kerne.fi/api/por/accounts, and its equity is a public read that requires no cooperation from Kerne.
2. The Insurance Fund, which holds a zero balance today. The fund at 0xE8799FCF327C6D2f78103a3c9308C93592A30403 publishes its balance hourly as insurance_fund_usd in the signed attestation. It becomes a second line once it is funded.
3. The Treasury, which holds a zero balance today. The treasury at 0x5343C41d4FF2B61DAacA9cbC050550C40605B075 publishes its balance hourly as treasury_usd. PSM swap fees accrue in the live mint PSM, readable there as accruedFees, and have not yet been swept to the treasury. None of them route to the Insurance Fund.
4. Behind those, nothing. There is no further backstop, no external guarantor, and no insurer. If the margin behind the hedge were exhausted, the position would be liquidated at the venue and the yield strategy would stop.

What does not absorb it, and why. Two things that a reader might reasonably expect to absorb a funding loss do not, and the reasons are structural rather than promissory.

• kUSD backing does not absorb it. Outstanding kUSD is backed 1:1 by USDC held in the PSM contracts, which is a separate book from the hedging venue. A funding payment cannot move USDC out of a PSM. The ratio is published hourly as psm_solvency_ratio and is recomputable from public on chain reads without any signature from Kerne.
• The skUSD share price does not decline. skUSD reports totalAssets from an internal ledger, as tracked assets minus yield that has not finished vesting. The only operation that reduces that ledger is a holder withdrawing their own assets. There is no function that writes it down, and no administrative path that removes assets from the vault other than sweeping tokens that were never credited to holders. So negative funding does not reduce staker principal. What it does is stop distributeYield from being called, which leaves the share price flat. Stakers stop earning; they are not written down.
• The reason for that separation is the current stage, not a guarantee. The basis position does not presently back any kUSD. The signed attestation reports hedge_base_eth as 0.0 for exactly this reason, and publishes WARNING_DELTA as a result. When the basis position does back kUSD, a funding loss lands on collateral that backs a liability, and with an unfunded Insurance Fund there would be nothing between that loss and holders. That is the condition under which this section changes, and it will be rewritten before that happens rather than after.

One commitment, so that it can be checked. The tempting failure under sustained negative funding is to keep paying a headline yield by minting kUSD that no reserve stands behind. Kerne will not do that. The check is not a promise: psm_solvency_ratio is published hourly in a signed statement and is recomputable by anyone from on chain reads, and minting unbacked kUSD would push it below 1 in the same hour it happened.

There is no funding level at which the position closes automatically. The sentinel raises an alert when hourly funding falls below negative 0.0001, one basis point an hour, and that alert notifies and does nothing else. Across the last 4,320 hourly ETH funding settlements on Hyperliquid, a full 180 days, the most negative single hour was negative 0.0000728, so the alert has not fired, and the threshold is being recalibrated. The staged hedge reduction after 72 and 120 consecutive hours of negative funding is specification, not deployed code, and is listed as such in the Exit Triggers and Emergency Runbook and at kerne.fi/api/risk-status. The automated unwind paths that exist today are the loss breakers, whose floors of $50,000 daily and $10,000 hourly sit above the size of the current book, so at present scale closing the position is a manual decision.

APY Disclaimer

APY is variable and not guaranteed. Past performance, including backtested results, does not guarantee future returns. The live rate on the deployed basis is computed from prevailing funding and staking conditions and published at kerne.fi/api/apy. It can compress toward zero, and turn negative, when perpetual funding inverts. These figures may not be representative of future conditions. Actual returns may be higher or lower depending on funding rate conditions, staking yields, and market regime.

Opal Fragments Disclaimer

Opal Fragments have no guaranteed monetary value. They are a loyalty mechanism, not a financial instrument. The $KERNE conversion rate at TGE depends entirely on total protocol participation and is not predetermined.

Not a Bank Deposit

kUSD is not a bank deposit or insured instrument. It is not FDIC insured and is not issued by a regulated financial institution.

Restricted Jurisdictions

The Services are not intended for, nor offered to, individuals or entities residing in, citizens of, or located within any "Restricted Jurisdiction." This includes regions subject to comprehensive sanctions or embargoes by Canada, the U.S., the UK, the EU, Panama, or the UN (such as Russia, Iran, North Korea, Syria, Cuba, and specific regions of Ukraine), as well as any jurisdiction where cryptocurrency transactions are prohibited. Access is strictly denied to "Restricted Persons," defined as any individual or entity on a global sanctions list or those controlled by parties in restricted areas.

There are no exceptions to these rules. You are strictly prohibited from using VPNs or other technical workarounds to bypass these geographic restrictions. By connecting your wallet, you warrant that you are not a Restricted Person and that you will not operate the services from within a prohibited territory. You also agree not to modify, reverse engineer, or adapt the Services to facilitate access for restricted parties.