Apyx & DAT Risks

The risks associated with Apyx and Digital Asset Treasuries (DATs), as well as common misconceptions related to DATs.

Apyx is designed to deliver yield sourced from dividend-bearing preferred equity issued by Digital Asset Treasuries (DATs). apxUSD is not a fiat-backed stablecoin. apyUSD yield is not guaranteed. Neither token is risk-free.

This section outlines the principal risks associated with:

• apxUSD

• apyUSD

• Offchain collateral custody

• Digital Asset Treasuries (DATs)

• Smart contracts and DeFi infrastructure

I. Structural Design Risk

No Fixed 1-1 Peg

apxUSD is not designed as a strict 1-1 peg instrument. The protocol explicitly avoids fixed-peg representations. apxUSD may trade modestly above or below a one-dollar reference value.

This design:

• Reduces levered looping

• Encourages organic, long-term participation

• Slows reflexive TVL expansion

• Allows liquidity buffers to scale responsibly

However, users must accept modest price variability.

II. Collateral & Market Risk

apxUSD is backed primarily by perpetual, dividend-bearing DAT preferred equity, along with cash and short-term treasuries. These are public securities. They are not insured deposits.

Preferred Equity Market Risk

Preferred shares:

• Trade in public markets

• Can deviate from par value

• Depend on issuer dividend policy

• Are subject to liquidity conditions

Dividend-adjustment mechanisms are economic tools, not legal guarantees. In stressed markets, preferred prices may decline.

Credit & Counterparty Risk

The value of apxUSD depends on the creditworthiness of DAT issuers. If a DAT:

• Experiences financial distress

• Defaults on obligations

• Enters restructuring or bankruptcy

The market value of its preferred shares may decline significantly, potentially to zero. Preferred equity ranks below debt in the capital structure. In insolvency scenarios, recovery may be limited or nonexistent.

Dividend & Yield Risk

apyUSD yield depends entirely on dividends from DAT preferred shares. Dividends may be:

• Reduced

• Suspended

• Delayed

• Modified

If dividends decline, apyUSD yield declines. Yield is variable and set monthly.

Liquidity Risk

DAT preferred shares are generally less liquid than U.S. Treasuries. During stress:

• Bid-ask spreads may widen

• Execution costs may increase

• Collateral liquidation may impact price

The protocol maintains a cash and treasury buffer (5–25%) and targets Protocol-Owned Liquidity (POL) ≥ 10% of TVL to mitigate this risk, but liquidity constraints cannot be eliminated.

III. Peg Stability & Hedging Limitations

Apyx seeks to reduce volatility relative to underlying preferreds. Target volatility is approximately 2% standard deviation. Risk management tools include:

• Cash/treasury buffer

• Protocol-Owned Liquidity

• Variable monthly payout adjustments

• Diversification across issuers

• Optional high-gamma derivative hedging

As described in our hedging framework Hedging Overview, we may deploy put options on:

• DAT equities

• Underlying crypto assets

However:

• Hedging costs capital

• Timing may be imperfect

• Hedges do not eliminate issuer default risk

• Correlations may increase in systemic stress

Hedging reduces certain volatility risks; it does not eliminate structural credit risk.

IV. Offchain Custody Risk

Most collateral is acquired offchain and held with third-party custodians.

Risks include:

• Custodian insolvency

• Operational failure

• Fraud or misconduct

• Settlement delays

• Regulatory intervention

• Security breaches

Collateral may become inaccessible or unrecoverable in certain scenarios. Monthly PCAOB-level attestations improve transparency but do not eliminate custodial risk.

V. Redemption & Timing Risk

apyUSD redemptions follow an asynchronous model:

• ~30-day cooldown

• One pending request per user

• Cooldown resets if modified

• No yield during cooldown

Users bear timing and market risk during the unlock period.

VI. Smart Contract & Technical Risk

The protocol relies on smart contracts and DeFi integrations. Risks include:

• Smart contract bugs or vulnerabilities

• Governance misconfiguration

• Oracle failure

• Integration errors

• Cross-chain bridge exploits

• Third-party DeFi protocol risk

Audits, testing, and monitoring reduce but do not eliminate technical risk.

VII. Cross-Chain & Third-Party Platform Risk

apxUSD may be deployed across multiple blockchain networks and integrated into third-party applications. Risks include:

• Bridge exploits or failures

• Loss of funds in cross-chain transfers

• Interaction with malicious smart contracts

• Integration by unauthorized third-party platforms

The Issuer does not control third-party integrations and disclaims responsibility for losses arising from their use.

VIII. Regulatory & Legal Risk

Digital asset regulation is evolving rapidly. Changes may impact:

• Stablecoin classification

• Securities law interpretation

• Custody requirements

• Geographic availability

• Tax treatment

• Enforcement exposure

Regulatory changes may restrict access, reduce liquidity, or impair operations.

IX. Tax Risk

Minting, redeeming, transferring, or accruing yield may trigger taxable events for users. Tax treatment:

• Varies by jurisdiction

• May depend on distribution mechanics

• May create liabilities at unexpected times

Users are responsible for understanding and complying with applicable tax laws. The platform does not provide tax advice.

X. DAT Risks: Facts vs. Fiction

Because apxUSD collateral contains DAT preferred equity, understanding DAT risk is essential. Much of the public narrative surrounding DATs is incorrect. Below we separate real risks from misconceptions, based on our internal credit evaluation framework.

The Real Risks

1. Bankruptcy Risk

In a worst-case scenario, a DAT could go bankrupt and its preferred equity could become impaired or worthless. Preferred equity sits:

• Below debt

• Above common stock

In liquidation, debt holders are paid first. A DAT could face distress if:

• Crypto prices decline severely and remain depressed for years

• Fixed obligations exceed available liquidity

• Capital markets access closes

• Management misallocates capital

We evaluate asset coverage, debt maturity profiles, and dividend sustainability to assess this risk.

2. Crypto Sales & mNAV Death Spiral Risk

The DAT model is built on accumulation. Selling crypto can:

• Reduce asset coverage

• Compress mNAV

• Increase perceived credit risk

• Trigger reflexive confidence collapse

This scenario requires multiple simultaneous failures, including market collapse and capital markets closure. While possible, it is not mechanically triggered by price declines alone. We monitor management discipline and capital structure to avoid exposure to vulnerable structures.

Common Misconceptions

Myth: There’s a fixed liquidation price. Most DAT debt is unsecured. Unsecured creditors cannot force liquidation solely due to crypto price declines. Liquidation occurs upon payment default, not volatility.

Myth: DATs are equivalent to margin accounts. DATs are public companies with disclosed capital structures and defined debt hierarchies. They are not levered offshore lenders with short-term liabilities.

Myth: Activists will force liquidation. Many DATs are founder-controlled, and shareholders often favor accumulation. Forced liquidation may destroy value rather than unlock it.

How Apyx Evaluates DAT Credit Risk

We evaluate each preferred instrument based on:

• Asset coverage

• Interest and dividend coverage

• Debt structure and covenant terms

• Acceleration clauses

• Capital allocation discipline

• Transparency and communication

• Preferred market liquidity

• Historical drawdown behavior

We avoid exposure to structures with price-triggered liquidation mechanics.

XI. Correlation & Systemic Risk

DAT preferreds may correlate with:

• Crypto markets

• Equity markets

• Liquidity cycles

• Capital market sentiment

In systemic stress, correlations may increase unexpectedly. Diversification reduces concentration risk but does not eliminate systemic exposure.

XII. Growth & TVL Risk

The protocol targets sustainable growth. However:

• Rapid TVL growth may outpace buffer expansion

• Yield compression may occur

• Competitive products may emerge

• Market perception may shift

We explicitly avoid hypergrowth at the expense of stability.

Summary

Apyx is designed to:

• Deliver yield sourced from public dividend-paying instruments

• Maintain overcollateralization

• Reduce volatility relative to underlying preferreds

• Employ layered risk management tools

However:

• It is not a fixed-peg stablecoin

• Yield is not guaranteed

• Bankruptcy risk exists

• Death spiral risk exists

• Market volatility can occur

• Regulatory changes may affect operations

Our philosophy is simple: We do not pretend these risks do not exist. We study them. We price them. We manage them.

Participation in Apyx should be based on a clear understanding of the credit, market, operational, and regulatory risks involved.