Proposal: Market Risk Management

Proposal: Market Risk Management

Summary

A proposal for continuous market risk management to optimize yield, capital efficiency, and mitigate depositor losses.

Background

Venus’s previous interest rate model and conversations with the Venus team shows the importance protocol stakeholders put towards understanding and mitigating risk. Over the past few years, Gauntlet has deployed our simulation platform to similar lending protocols and we are happy to state Gauntlet’s work has resulted in strengthening protocol structure and we continue to make parameter recommendations to optimize for capital efficiency as well as reduce insolvency risk.

Preventing insolvency is not the only market risk Venus faces. Deflationary spirals and shocks to market prices can’t simply be prevented without reducing the protocol’s utility. Tail-event scenarios are rarely the result of bad actors taking malicious actions against the protocol. The vast majority of Venus’s participants are honest but what’s good for the lender is not always good for the borrower. Depositors lend, borrowers borrow, and liquidators rebalance. This intersection is where Gauntlet comfortably sits, directing traffic per the stated desires of the community.

Gauntlet will onboard and then continuously rerun our simulations for the Venus Protocol, pushing regular changes to ensure optimal risk parameters. We will also deploy our asset listing framework to ensure new assets being proposed for the Venus Protocol meet the market risk standards that the community has set forth.

Proposal

The initial proposed scope will control for the target metrics Gauntlet aims to improve. Those metrics are:

  • Value at Risk
  • Liquidations at Risk
  • Borrow Usage

Gauntlet will improve the metrics above without increasing the net insolvent value percentage or the slashing run percentage.

Expectations

  • Risk Parameter Updates
    • Exclusively for Venus Protocol assets
      • Isolated pools with a 30-day average supply >$5M USD
    • Supported Risk Parameters: Loan-To-Value, Liquidation Threshold, and Liquidation Bonus
    • Market conditions will determine the frequency of updates. For that reason, no SLA will be preset.
  • Communications
    • Risk parameter changes will follow the standards suggested from the Venus core team.
    • Risk Dashboard (refer to the next section)
    • Quarterly Risk Reviews will provide a detailed retrospective on market risk.
  • Out of Scope
    • Modeling and support for the VAI stablecoin.
    • Protocol development work (e.g. smart contract upgrades that improve risk/reward).
    • Formalized mechanism design outside of supported parameters.
    • Oracle and smart contract risk analysis (e.g. smart contract or oracle audits).
    • Developing strategies to resolve existing bad debt.
    • Dashboard and long form written analysis for isolated pools.

Risk Dashboard

As part of this engagement, Gauntlet will build a Risk Dashboard for the community to provide key insights into risk and capital efficiency.

The dashboard focuses on the system-level risk in Venus and the market risk on an individual collateral level. Our goal is to help convey Gauntlet’s methodology to the community and provide visibility into why Gauntlet is making specific parameter recommendations.

The dashboard will monitor all collateral assets in Venus. The three key metrics are Value at Risk (VaR), Liquidations at Risk (LaR) and Borrow Usage.

Value at Risk conveys capital at risk due to insolvencies when markets are under duress (i.e., Black Thursday). The current VaR in the system breaks down by collateral type. Gauntlet computes VaR (based on a measure of protocol insolvency) at the 95th percentile of our simulation runs.

Liquidations at Risk conveys capital at risk due to liquidations when markets are under duress (i.e., Black Thursday). The current LaR in the system breaks down by collateral type. Gauntlet computes LaR (based on a measure of protocol insolvency) at the 95th percentile of our simulation runs.

Borrow Usage provides information about how aggressively depositors of collateral borrow against their supply. Defined on a per Asset level as:

where U is the utilization ratio of each user:

Gauntlet aggregates this to a system-level by taking a weighted sum of all the assets used as collateral.

To show Gauntlet’s impact, we measure these using the current system parameters and expected results (based on our simulations) if Venus implemented the proposed parameter recommendations.

Structure

Gauntlet charges a service fee that seeks to be commensurate with the value we add to protocols. We are offering Venus a 20% discount for a 2 year engagement bringing the contract value to $1.6M USD: this includes support for up to 50 assets on the core protocol, and coverage for isolated pools with a 30-day average total supply of >$5M. Gauntlet also wants to provide a strong signal of our alignment with the protocol. For that reason, we propose a fully refundable (up to 4 weeks prior to start date) deposit in stablecoin, and our contractual fee denominated in either stablecoin or $XVS. In addition, Gauntlet will deploy either the Sablier or Llama Pay contract for the 2 year engagement to provide the community a revocable option should our impact or engagement be deemed unsatisfactory.

About Gauntlet

Gauntlet is a simulation platform for on-chain risk management. Gauntlet uses battle-tested techniques from the algorithmic trading industry to help protocols manage risk, fees, capital efficiency, and incentives. Our agent-based simulation models optimize parameter decisions for tens of billions of dollars in DeFi TVL. Our prior work, includes assessments or continuous financial modeling for Compound, MakerDAO, Aave, Liquity, and many others.

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So excited about Gauntlet’s risk management proposal !

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Something I’ve been looking forward to for a while now!

This is what gets Venus to play side by side with AAVE/MAKER/COMPOUND!

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i think this proposal makes brad happy. good proposal and venus will achieve. i believe in you team

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the 1.6 million $ refers to the fees that Venus will pay to Gauntlet in 2 years?

seems high… doesnt it?

seems cool, but the fee is really high and i hope the team is not gonna pay that in xvs

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A Maslow pyramid like key element for Defi. Safety above all. Very happy to see this one. Great proposal.

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$1.6m fees is a lot. it seems you are charging this because the protocol can afford it. I reckon the cost of the service you’re providing is worth a few thousand at best…

Having a team of risk managers and market analyst working full time will be a good alternative and industry leading in my opinion.
Compound and aave grew expeditiously during the bull market so software was a quick and easy to implement solution for risk management. Compound is paying roughly $170k a year and aave is paying less than $600k a year (today’s token price). They both also have much more users and more borrowing on the protocol. These deals were struck during the bull market, it seems unjust to ask Venus for more money during a bear market, with much greater uncertainty

Gauntlet doesn’t do anything special either, it will provide venus with a generic report with suggestions and highlights potential risks. With the price they are asking it’s better to just hire 8 full time risk management and market analyst employees.
All the big organisations have team members, Think tanks and lawyers made up of people to best serve them. Organisations that solely rely on software are typically done for budgeting reasons as they can’t afford to hire experts. One of the most expensive softwares in the world is Nuke Studio and that only cost $11300… Film studios are making billions using it… No software should ever cost $800k a year.

I would trust Venus with my money more than aave and compound if they had a full time team of risk managers exclusively monitoring and reporting on the protocol.

Question for the community is overpriced software VS a team of experts working full time monitoring and reporting on Venus

Let me know if anyone else agrees

Link to gauntlet aave and compound proposals.

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Great proposal!
However, in order to improve the quality of its decision, the community needs more visibility about the current capabilities of Venus in terms of Risk Management and Risk Framework : human resources, skills, monitoring tools, simulation tools, Risk Management skilled experts in the community.
Then, it will be able to assess what would be added by Gauntlet.

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Fully agree with hiring the best industry experts with such money .

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I have few points regarding this proposal which I am listing them:
1- There are many risks, but the biggest risk in lending and borrowing business is not being able to recover the principle which become bad debts. Gauntlet was doing the risk management for Venus in the past and the protocol has almost highest bad debts in the market around 10%.
2- Developing strategy to resolve existing bad debts and many more are not part of the scope of their work and need extra payment or manpower.
3- 0.8 M $ for annual payment is too much for an algorithmic software based company and let’s remember one of the catalyst for Luna to dye was its algorithmic software based pegging and less involvement of humans.
4- If Venus had the Market Cap of ETH, then it was fine to pay such amount for a portion of its risk management but with the existing market cap; imho it’s too much and instead you can bring another firm with lower price and broader scope or hire the risk management team.
5- If protocol revenue is high and much more than predicted figures, I suggest to distribute the extra revenue to shareholders and increase the APY.

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My friend (data scientist) called the pricing model crazy, how much borrowing is happening shouldn’t define the price of service, this was the first time they ever heard of such a thing. The algorithm will work regardless of how much data (borrowing) is involved so it’s unfair and unheard of to charge based on this. They started laughing a lot :joy:
They looked through the report and said open source software should already exist and we could hire/employ a data scientist that will make their own risk model and algorithm that would be more tailored to our needs. This will very likely be better than what gauntlet is offering as applying a universal algorithm on Venus, it’s never going to be good as a tailor made one our own team of data analyst would make.

In regards to software, if the algorithm is really that good it could be worth $800k a year but she looked through the report they wrote and said there’s nothing unique here and said it’s fairly simple to replicate. They were pretty confident we could get most of the algorithms as open source solutions and the formulas they are using are also shared publicly so we could copy them if needed.
Making our own algorithm and risk model will take time, maybe a month minimum and it will take time for our new staff to get familiar with the data and make it presentable.

As for paying for the brand, they can’t comment on that but said having a big or known brand doesn’t mean you have a good algorithm and if they are applying a universal algorithm on Venus, it’s never going to be as good as a tailor made one our own data analyst would make.

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I would totally agree with you here, BUT lets be honest. Brad has no idea how to do risk management and neither does anyone on the team. Plus they cant hire any of the positions they have open now. But 1.2m seems pretty crazy imo and they are just charging that because they know they can.

So…what choice is there… The main issue here is that the team is weak because nobody wants to work on a centralized project.

It still boggles my mind that solving the debt isnt the number one issue and it wasnt solved months ago. This tells me that nobody at binance cares about xvs at this time otherwise they would have help solve it. Extremely disappointing so far. The fact that joselito still has SXP token on binance when he did what he did to the protocol speaks very loudly.

And before you say, “oh its a new team they are working give them time” The new team has had 6+ months now and the price went from 20s to 3s, and currently in the 5s. for a coin that only has 30m total supply and is supposed to be binances flagship lending coin, thats an incredibly small market cap. This tells us the team is not performing as they should. At this point you would assume funds in china would want to invest in the coin at this low price and there would be press releases about it. But all we have is binance in house traders using algos to suppress the price over and over and then pump and dump it. You dont see this with the main coins.

So lets be real.

And finally the optics of asking the community to donate 1% to charity looks really bad. The coin is down 95% and most people are sitting on losses. The team shouldn’t be worried about things like charity, they should be 110% focused on investor returns. Its clear posts like this are a lack of clear vision and leadership. If you read the comments in the twitter posts, most all people agree with this statement.

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No matter what we write here, on discord or anywhere else… Nobody cares. They will proceed as they want.

The fees are way too high, but its enough if some new setup accounts write “hey finally! What a great idea” and we will be forced to hire gauntlet…

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I had a doubt about their fair value of service costs. However, time will show us if the Gauntlet really works for both Venus Protocol (if we get it) and other major protocols that get similar service. But all Protocols like us have received this service AAVE, MKR, COMP (ETH network), BENQI (Avalanche network). I think that obtaining this service will give confidence to the institutional investor.

Risk management is important for financial institutions. I think that this is also significant for big players who are using the defi protocols. For this reason, Gauntlet would be a good reference for the contribution of mass adoption for Venus.

Appreciate for the office hours.

Regards

Yikes. Venus should spend 10x as much because they want to show “decentralization”?

Does anyone here think that venus is really decentralized? Thats such a bad point and the aggressiveness that Brad cut off the guy whos asking the question says a lot about it.

That being said, I dont think ANYONE here has any confidence in Brad to do risk management or to manage a group of people working on risk. He already fumbled the ball on the 10m exploit, and really at this point, who cares, binance is paying for this stuff in the end. :rofl:

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I’ve found another defi risk management company. So far everything looks good. Please visit them at coinfirm.com and let me know what you think. I believe we should reach out to them!

Not expensive enough… (just joking)
Nice find.

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