DeFi & Crypto-Specific Risks

Operational Risk

Value at Risk (VAR)

Value-at-Risk (VaR) is a model to measure market risk. VaR is a statistical measure used to calculate the maximum potential loss caused by market movement under business-as-usual circumstances. It is defined as the maximum dollar amount expected to be lost over a given time horizon, at a pre-defined confidence level, given normal market conditions. It’s important to note that this measure doesn’t provide any guidance on how much can be lost in a “black swan” type event.

VaR is commonly used in TradFi to calculate potential losses. By aggregating portfolio level VaRs organizations can understand the maximum potential organizational losses and take a quantitative decision on risk, either by increasing capital reserves or moving into lower-VaR positions.

Because VaR is applicable to any group that holds assets subject to market fluctuations, it can easily, and usefully, be applied to Crypto as a financial primitive.

Last modified 5mo ago

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