Risk Framework
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This framework aims to standardize analyses of new underlying markets to be integrated into Yield Tranches and Best Yield by quantifying and assessing the risks related to new underlying strategies. It is composed of four sections that lead to a final rating.
Risks affecting DeFi protocols can be segregated into systemic risks or risks that impact a large part or all of the DeFi ecosystem such as currency, regulatory and chain risks, and idiosyncratic risks or risks that impact a single protocol or group of protocols, such as smart contract, governance, market, financial and oracle risks.
Risk | Metrics |
|---|---|
Smart contract | Immutable or upgradeable SC, audits, track record of auditors, number of hacks and third-party protocol dependencies |
Governance | Team transparency, admin keys control, level of governance concentration and governance-related issues, emergency exit plan |
Market & Financial | Total Value Locked, complexity, longevity, tokenomics |
Oracle | Oracle dependencies, oracle fallbacks |
The framework is constituted of four parts:
- 1.Third-party review (33%) considering the reports of DeFi Safety and Exponential. These reviews will ensure that part of the risk rating will be based on independent analyses, avoiding any centralization issue that could affect Idle’s risk-scoring impartiality.
- 2.Internal Security review (33%) focusing on Protocols risks from a smart contract, governance and market perspective. This review will be done by Idle DAO based on publicly available information and will use the same metrics for every protocol analyzed.
- 3.Strategy review (34%) assessing the risks of each specific vertical, such as overcollateralized lending, uncollateralized lending, automated market makers, liquid staking and more.
- 4.Coverage measuring the minimum coverage needed to let the Best Yield deposit funds into the Yield Tranches pools.
The DeFi Safety and Exponential scores consider the vast majority of the Protocol risks related to Idiosyncratic risks:
DeFi Safety metrics
Exponential metrics
The DeFi Safety score will be time-adjusted, considering when the report was last updated. The older the analysis, the lower the score.
Components:
- Smart contracts and team
- Documentation
- Testing
- Security
- Admin controls
- Oracles
where PF stands for Protocol fundamentals and PE for Pool economics.
Components:
- (PF) Asset strength
- (PF) Protocol code quality
- (PF) Protocol maturity
- (PF) Protocol design
- (PF) Chain design
- (PE) Collateralization and leverage
- (PE) Impermanent loss
- (PE) Yield outlook
- (PE) Chain reliability
This review mainly focuses on smart contracts and market/financial risks.
Type | Description |
|---|---|
Audit | Number of audits and quality of auditors |
Bad debt, LP losses | Severity of losses incurred, if any (% vs TVL) |
Bug bounty, Insurance | Size of bug bounty program |
Protocol TVL | Total value locked across all chains (average since protocol inception) |
Pool TVL | Total value locked on Ethereum (average since pool inception) |
Protocol longevity | Months of activity |
Pool longevity | Months of activity |
The Strategy component refers to specific risks related to each underlying market integrated into Idle strategies. The strategy score will be composed of a fixed parameter associated with the vertical and a score associated with thematic risks.
Current underlying sources
- Best Yield: Aave, Compound and either Senior or Junior tranches.
- Yield Tranches: Euler, Morpho, Lido and Clearpool.
Vertical | Metric |
|---|---|
Overcollateralized lending | Collateral fully diluted value (FDV) |
| Maximum borrowed amount |
Uncollateralized lending | Credora's borrower capacity |
| Credora's borrower rating |
Liquid staking | Validator concentration |
| Validators key management |
The Coverage component measures the minimum coverage needed to let the Best Yield deposit funds into the Yield Tranches pools.
This metric behaves differently with respect to the others listed and will be computed on a case by case need. It will be summed to the previous scores obtained with the reviews: Third-party, Internal Security and Strategy.
The Risk Framework will assign a percentage score that will be then translated to a letter rating (A-E) based on the protocol risks evaluation, where
- A will be given to the highest-rated protocols in terms of overall risks
- E will be given to the lowest-rated protocols in terms of overall risks
Rating | A | B | C | D | E |
|---|---|---|---|---|---|
Upper bound | 100% | 85% | 70% | 55% | 40% |
Lower bound | 85% | 70% | 55% | 40% | 0% |
Last modified 1mo ago