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.

• Structure

  • Third-party review

  • Internal Security review

  • Strategy review

  • Coverage

• Risk 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

Structure

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.

1. Third-party review

The DeFi Safety and Exponential scores consider the vast majority of the Protocol risks related to Idiosyncratic risks:

DeFi Safety 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

Exponential metrics

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

2. Internal Security review

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

3. Strategy review

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

4. Coverage

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.

Risk rating

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%

The Governance discussion can be found here: Risk Framework (v1)

The full analysis is available here: Risk Framework [PUBLIC]