Venus Risk Assessment Framework
The purpose of this documentation is to explain the process of risk assessment for currencies supported by Venus protocol. The assessment is mainly based on the current market condition and protocol user data, because the Venus Risk Management Team wants to be in a relatively objective manner. The assessment uses the quantitative model/score to measure the market, liquidity, counterparty risk, aiming to contribute to higher risk standards within DeFi. The framework is open to the community. Let’s monitor and innovate it.
Issues When adding assets
Venus enables users to deposit and borrow assets(cryptocurrencies) through a decentralized protocol. More details on how the protocol works can be found in Venus’s Whitepaper.
Given the specificities of DEFI’s nature, the selection of cryptocurrencies and the pool parameters are important risk management components. The protocol cannot accept new assets as collateral without assessing its overall risk. The issues of adding assets without good assessment can be:
- Newly added currency will increase the risk of insolvency. In the Venus Protocol, users have two options, supply or borrow. The supply currencies are used as collateral, while the borrowed currencies are liabilities. The collateral and liabilities cannot match for some time. In the real scenario, stable coins or coins with high recognition are mostly borrowed and backed by volatile tokens. This means the protocol is heavily exposed to the failure of supported token systems as well as market fluctuations.
The most recent incident in Venus is just because of this, large amounts of volatile tokens were backed while the loans are mostly large coins like BTC/ETH. Since there is a significant drop in the relative price, the collateral amount is not enough to support the loan.
- A centralized currency exposes the protocol to suspicious price manipulation. Although Venus is a decentralized protocol, the centralized tokens can cause a single point of failure risks. This together with the issue above can make a big risk for the protocol. It’s easy to do the price manipulation for the centralized token, and use this twisted token to be the collateral. Bad collateral quality can easily cause insolvency.
Therefore, the existence of Risk Assessment is a must when adding assets. Currencies with a worthy product and a significant community are easier to be recognized by the market and have a relatively lower market and liquidity risk. Therefore, Venus protocol tends to add currencies with a worthy product and significant community. The risk assessment framework will evaluate and understand the risk brought to the protocol, and help to calibrate the risk parameters to monitor, control and manage the risk.
The assessment is mainly based on the current market condition and protocol user data which means protocol is more focusing on market, liquidity, counterparty risk, as these can be easily quantified and reflect market recognition in a relatively objective manner. To ensure a currency holds a reasonable amount of risk, we investigate six different risk metrics.
Depth Level is to measure the order book depths of major exchanges. We look at the weighted market depths of different levels for all the symbols related to the asset. This is mostly useful to check the liquidity of the asset.
Volume Level is the average 24h volume from major exchanges for the assets. We look at the average values at 1 week, 1 month and 3 month. This is also useful to check the liquidity of the asset as well as the size of the market.
Volatility Level is the standard deviation of the log-return for the assets. We look at the normalized fluctuations in the currencies price and calculated as the standard deviation of the logarithmic returns for 1 week, 1 month and 3 month term. This is mostly useful to check the Volatility of the asset which is part of the market risk.
Index Level is to measure if the asset is widely accepted by different major exchanges. We mostly look at the price index from exchanges and the market capitalization for the current evaluation time. This is an indirect way to check the trust and counterparty risk for the asset.
Code Commit Level is to measure the popularity and project quality. We mostly look at the commit times and stars for the project. This is a publicly available data to measure the counterparty risk for the asset
Contract Holder Level is the reflection of holders’ data in the Venus proctol. This helps check the liquidity of the protocol which is the availability of the capital to face business operations: borrowing amounts and redeeming vTokens. The lack of protocol liquidity will block business operations.
Depth and Volume Levels help to measure the liquidity risk of the asset. Depth, Volatility and Index Level help to measure the market movement of the assets(Market Risk). Index Level and Code Commit Level help to measure the quality of the asset(Trust and Counterparty risk). Contract Holder Level helps to check and monitor the robustness and liquidity of proctol.
For each Risk Metrics, we will use a quantitative method to generate a score scaled in the range of 0 to 1. Based on the score, we give a level from best I to worst V except for “Index Level”. The level for “Index” is P(Poor), M(Moderate), G(Good).
Then we used different weights for each metric, and generated an overall soce. We will give each asset a score from lowest risk I for the safest assets of the protocol (often Stable coins & BTC) to the highest risk V.
Risks per Asset
Risk Analysis per Asset
This part briefly describes the background and ratings for each crypto currency. The descriptions mostly come from publicly available resources like the project itself, CoinMarketCap, crypto.com and CoinGecko. The reasons for rating are mostly based on Venus protocol’s own judgement.
Overall Rating: I
Tether is the first and the most widely accepted USD backed stablecoin, Tether has further consolidated its market dominance by taking advantage of the Defi space.
USDT is widely available in different exchanges and is the stablecoin with the highest volume. All the market indicators of USDT are at the highest level.
Overall Rating: I
BUSD is a USD-backed stable coin, launched by a partnership between Paxos, expert in stable coin, and Binance, a major player in the industry. Approved and regulated by the New York State Department of Financial Services (NYDFS), BUSD has been enjoying a fast growth in both CEX and DEX space.
BUSD is widely accepted for both CEX and DEX, especially for the BSC. All the market indicators of BUSD are at the highest level.
Overall Rating: I
USDC is a USD-backed stable coin. It is issued by regulated financial institutions, backed by fully reserved assets, redeemable on a 1:1 basis for US dollars, and governed by Centre, a membership-based consortium that sets technical, policy and financial standards for stablecoins.
USDC is the 2nd largest stable coin widely accepted for both CEX and DEX. All the market indicators of USDC are at the highest level.
Overall Rating: II
DAI is a decentralized, unbiased, collateral-backed stable coin soft-pegged to the US dollar. It is perhaps by far the most successful decentralised stablecoin built on the Ethereum network with its value backed by overcollateralization.
Compared to other stable coins, DAI has a relatively smaller volume and poor depth. The price volatility is also relatively higher.
Overall Rating: I
ETH is a blockchain network, the largest decentralized public ledger for verifying and recording transactions. The network’s users can create, publish, monetize, and use applications on the platform, and use its Ether cryptocurrency as payment. Insiders call the decentralized applications on the network “dapps.”
As one of the most important pillars in the crypto world, all the market indicators of ETH are at the highest level.
Overall Rating: I
BTCB is a BEP2 token that is 100% backed by Bitcoin (BTC). The reserve addresses are published for anyone to audit.
A trading pair will be created on BSC between the pegged token and the native coin. Large buy orders will be maintained on the trading pair on BSC, with a price spread of around 0.1%. This provides a way for anyone to convert from the pegged token back into the native coin on BSC. If this buy order is filled, a new order will be placed while an equal amount of funds will be deposited from the reserve address into BSC. The sum of the buy order and the funds on the published reserve address will be bigger than the total supply of the pegged token, which would theoretically ensure 100% backing.
Therefore, we can use the market indicators of BTC instead of BTCB when we check the risk. All indicators are at the highest level.
Overall Rating: I
Binance Coin (BNB) is a cryptocurrency used to pay fees on the Binance cryptocurrency exchange. Fees paid in Binance Coin on the exchange receive a discount. Binance is the world’s largest cryptocurrency exchange known for its fast processing speeds and ability to process enormous transactions at the same time.
As one of the most important infrastructure in the BSC network, all the market indicators of BNB are at the highest level.
Overall Rating: II-
Cardano (ADA) is a decentralised public blockchain and cryptocurrency project and is fully open source. Cardano is developing a smart contract platform that seeks to allow complex programmable transfers of value in a secure and scalable fashion through its unique solutions. It is the first blockchain platform to evolve out of a scientific philosophy and a research-first driven approach.
ADA has good overall risk metrics. But a relatively poorer depth, market making level, holder level, as well as a larger volatility are the reasons we cannot put ADA to the highest level.
Overall Rating: III+
Polkadot is a shared protocol that enables blockchain networks to operate together. Polkadot is an open-source project founded by the Web3 Foundation. The Polkadot coin serves three distinct purposes: governance over the network, staking, and bonding.
DOT has moderate risk metrics. Compared with similar networks like ADA and BNB, DOT is not as good as them. We can only put DOT into a moderate rating level.
Overall Rating: III-
Bitcoin Cash (BCH) is a peer-to-peer electronic cash for the Internet. It is fully decentralized, with no central bank and requires no trusted third parties to operate. Bitcoin Cash is the continuation of the Bitcoin project as peer-to-peer digital cash, which seeks to add more transaction capacity to the network. Bitcoin cash is therefore a hard fork of the Bitcoin blockchain ledger, with upgraded consensus rules that allow it to grow and scale.
BCH has relatively poor risk metrics. Although BCH is the hard fork of BTC and has been widely used, the current market condition cannot support us to put BCH to a higher rating position.
Overall Rating: III
LINK is a cryptocurrency that powers the Chainlink protocol. The LINK Network is a fully decentralized Oracle network that provides smart contracts to enable the sending of payments from the contract to bank accounts and payment networks. As well as connect smart contracts to the data sources and APIs they need to function easily.
Most of the risk metrics of LINK are just moderate. Although LINK has become increasingly relevant becoming one of the most successful Ethereum projects. Current market conditions can only support LINK to a moderate rating position.
Overall Rating: III+
Litecoin (LTC) is one of the oldest cryptocurrencies. Litecoin as a cryptocurrency is a fork of Bitcoin, therefore they share many of the same characteristics but LTC benefits from shorter block generation times as it uses a faster payment confirmation schedule and a different cryptographic algorithm. Litecoin also has lower transaction fees than Bitcoin.
LTC has a similar market condition with less volatility compared to DOT. Therefore, we put LTC to a moderate rating position.
Overall Rating: II-
Ripple (XRP) connects traditional financial institutions, payment providers, digital asset exchanges and corporations via RippleNet, an independent real time gross settlement system, to provide one frictionless experience to send money globally. It is built on the most advanced blockchain technology that is scalable, secure and interoperates with different networks.
XRP has a similar market condition with a higher market making level compared to ADA. Therefore, we put XRP to a relatively high rating position.
Overall Rating: III
Based on the popular “Doge” internet meme and featuring a Shiba Inu on its logo, Dogecoin (DOGE) is a cryptocurrency that was forked from Litecoin in Dec 2013. Dogecoin has been used primarily as a tipping system on Reddit and Twitter to reward the creation or sharing of quality content. Dogecoin was created by Billy Markus from Portland, Oregon and Jackson Palmer from Sydney, Australia. Both had envisaged Dogecoin as a fun, light-hearted cryptocurrency that would have greater appeal beyond the core Bitcoin audience. There is no hard cap on the number of Dogecoins that can be produced.
Although the market condition for DOGE has been relatively good for the recent several months. The high volatility and holder level makes us put DOGE to the moderate rating position.
Overall Rating: IV
Filecoin is a decentralized storage system that aims to “store humanity’s most important information. The project was first described back in 2014 as an incentive layer for the Interplanetary File System (IPFS), a peer-to-peer storage network. Filecoin is open protocol and backed by a blockchain that records commitments made by the network’s participants, with transactions made using FIL, the blockchain’s native currency. The blockchain is based on both proof-of-replication and proof-of-spacetime.
FIL has relatively poor liquidity as well as the index level. These make us put FIL to a relatively poor rating position.
Overall Rating: IV+
Venus Protocol is an algorithmic-based money market system designed to bring a complete decentralized finance-based lending and credit system onto binance smart chain. Users supply collateral to the network that may be borrowed by pledging over-collateralized cryptocurrencies. The lender receives a compounded interest rate annually (APY) paid per block.
Although Venus team takes much effort to enable XVS more functionalities and help build the community much better with the ongoing process, the inception of the XVS token has witnessed high levels of volatility that put’s the overall rating of XVS to a relatively poor rating position.
Overall Rating: IV+
SXP is a cryptocurrency that powers The Swipe Wallet. The Swipe Wallet has been designed to require Swipe Tokens SXP to perform all functions and utility of the Wallet including to use the services and to make withdrawals. Users on the Swipe Wallet can buy, sell, and pay with their cryptocurrencies to fiat directly within the Wallet application as well as purchase Gift Cards and make instant exchanges between all supported assets.
Users are able to use their SXP tokens on launch and there are also tiered benefits based on the SXP holding on the Wallet Contract. All Swipe Wallets require a 1 SXP deposit to activate and utilize on-chain functions based on an audited Smart Wallet-Contract to perform its duties.
The market condition of SXP is quite similar to XVS with a lower volatility and better market making level. All these make the rating position of SXP also be relatively poor.
Asset Risk Map
The rating details can be referred to the table below. Descriptions for each risk metrics and overall ratings have been discussed before, you can refer to the previous section. Each quarter, we will do the assessment once, and put the historical and newly added table here.
(Assessed by the data on June 30th.)
Risk Parameters Setting
Currently, the very important risk factors are collateral factors, reserve factors and liquidation incentives. In the roadmap, we will soon import a liquidation threshold. For the liquidation incentives, the values are the same for most assets, we will also import the features of different incentives.
The table below shows a summary of the current values for the parameters setting.
|baseAsset||Reserve Factor||Collateral Factor||Liquidation Incentives|