# Diversification Risk

The web3 space has a high level of operational risk that arises from assets built on top of protocols that might harbor contract bugs, exploits, rug pulls, and team and regulatory risks. These risks are typically not captured in historical data and can create a spurious correlation between assets.

The Correlation add-on allows the protocol to limit the margin benefit to multi-asset portfolios that over-rely on historical data. An example of this would be a portfolio consisting of two stable coins. The long-window historical volatility shows close to perfect correlation; however, we subjectively know that one protocol contract might be flawed or the regulatory framework surrounding its pegging mechanism could be at risk. Therefore, the protocol can make a subjective decision to negate any correlation between these pairs. Given this is DeFi, Concordia will take a more conservative approach and limit most of the correlation benefits in multi-asset portfolios.

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