Risk management
Asset risk: Asset risk considers the effects of adding a new asset. The methodology of quantifying the risk of each asset assesses its suitability as well as the appropriate risk parameters.
Payment risk: Liquidity risk presents on-site liquidity risk mitigation strategies that validate them by analyzing the historical usage of the protocol and the liquidity of the SFT.
Interest model: SFT's interest rate model is at the heart of the Binance Smart chain for liquidity risk management. As the utilization efficiency increases, the SFT value also increases due to the higher cost of goods. The Interest Rate model is described with the parameters of each stage of development.
SFT's risk framework: With billions of assets locked, Decentralized Finance (Defi) has exploded on the Binance Smart chain in recent years.
The industry has been developing risk frameworks to shape industry standards to manage the risks that emerge from our hyper-connected ecosystem. Safety can keep security at its core, It needs transparency to go through the tests of Open Zeppelin Security and Trail of Bits, and publishes Monthly Security Report on Medium.
The following document analyzes the underlying risks of the protocol and describes the procedures in place to mitigate them.
The composability of the SFT ecosystem implies risk from a single component flow into all dependent systems. Currencies are central to the protocol because they enable the operation and holding of the assets and obligations of the protocol.
This document, developed by the Risk Management Team, focuses on risk assessment for SFT-backed currencies. The risk assessment considers the market, counterparty and smart contract risks for selected currencies for the SFT protocol, aiming to contribute to a higher risk standard than Binance Smart bottle.
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SFT allows users to deposit and borrow digital currencies through a pooling of funds. Depositors receive interest issued by the protocol carrying the SFT, the collection of deposits and the generated interest. Each loan is secured by collateral that acts as a risk mitigation tool against default. As a medium of exchange, the currency is at the heart of SFTbolo's Binance Smart Chain non-custodial lending business. You can find more details on how SFT's Binance Smart chain Whitepaper works
Given the specific characteristics of the Safety model, currency selection was made with the following constraints:
Each additional currency slightly increases the gas cost of perpetual borrowing and redemption actions. The currency must be included in the Binance Smart Chain smart contract, which adds complexity and therefore increased costs.
Risk scale
Our risk scale ranges from the lowest risk A+ for the most secure assets of the protocol (usually BNB) to the highest risk D-. Assets with high-risk factors may be considered for integration. However, they would not qualify as collateral to shield solvency.
Risk factors
No platform can be considered completely risk-free. The risks associated with the BNB platform are smart contract risk (risk of errors in protocol code) and liquidation risk (risk during collateral liquidation). Every possible step has been taken to minimize the risk as much as possible - the protocol code is open source and public and it has been audited. Also, there is a life and running a bug bounty campaign.
Smart contract risk
Smart contract risk focuses on the technical security of a currency based on its underlying code. If a Binance Smart chain of supported currencies is compromised, the collaterals will be affected, threatening the solvency of the protocol. Projects have to go through audits to be considered, however, smart contract risks are huge, bug bounties can help but cannot be completely mitigated. We evaluate the time to maturity based on the number of days and transaction volume of the smart contract as a proxy for usage, community and development. These proxies show how the Binance Smart Chain tested code goes.
Smart contract hacks have resulted in millions of losses, and therefore the currencies with the highest smart contract risk D+ and below, cannot be used as collateral. Currencies with a risk rating below cannot be integrated with the Binance Smart chain protocol
Market risk
Market risk is related to market size and fluctuations in supply and demand. These risks are particularly relevant to protocol assets: collateral. If the value of the collateral falls, it may reach the liquidation threshold and begin to be liquidated. The market then needs to hold enough volume for liquidations - selling tends to lower the price of the underlying asset as slippage affects the salvage value.
We consider the average Binance Smart Chain 24h volume representing currency availability to assess liquidity risk: E [mass] E [mass]
Volatility risk, based on the normalized fluctuations of currency prices and calculated as the standard deviation of logarithmic returns.
We consider these values at 1 week, 1 month, 3 months, 6 months and 1 year
Cryptocurrencies can be subject to sudden fluctuations; It is not uncommon to see a 30% change in the price of Binance Smart Chain within a week or a month. When this is a price increase, to protect our users it may be followed by a parameter adjustment to limit the risk of new operations.
Finally, we also consider market capitalization as a proxy for the size of the market.
Market risk is used to calibrate the model's risk parameters. Volatility helps determine the required collateral, Loan to Value. Liquidity risk is prevented by liquidation incentives: Liquidation thresholds and bonuses.
Risk assessment
Loan for value
The Loan to Value (LTV) ratio determines the maximum amount of currency that can be borrowed against particular collateral. It is expressed as a percentage: at LTV = 75%, for every 1 BSC of collateral, the borrower will be able to borrow 0.75 BSC worth of the respective currency. Once borrowed, LTV will grow according to market conditions.
Liquidation threshold
The liquidation threshold is the percentage at which a loan is determined to be unallocated. Eg: The Liquidity threshold of 80% means that if the value rises above 80% of the collateral, the loan is not decentralized and can be liquidated.
Liquidation Bonus
The Loan-Value and Liquidity Threshold balance is a safety buffer for the borrower.
Liquidation Bonus
Bonus at the asset price of the collateral when the liquidator purchases it as part of the liquidation of a loan that has passed the liquidation threshold.
Health factor
For each loan, these risk parameters allow the calculation of the health factor:
Risk parameter Solvency protection.
From market risk to risk parameters.
Market risk assessed.
Credential
Liquidity is based on volume in the market, which is key to the liquidity process. This can be mitigated through liquidity parameters: The lower the liquidity, the higher the number of tokens.
Market capitalization
Market capitalization represents the size of the market, which is important when it comes to collateral liquidation. This can be mitigated through liquidation parameters: The smaller the market cap, the higher the incentive.
Last modified 1yr ago