Risk Metrics

Credmark maintains a risk register of the main risks identified in DeFi protocols. The significant risks associated with Aave and Compound investigated in the current analysis are:

• Market risk – the risk of market price volatility measured in potential loss under normal conditions.

• Liquidity risk – the risk that an organization will have insufficient funds to meet its financial commitments on time.

• Operational risk - the risk of losses caused by flawed or failed processes, policies, systems, or events that disrupt business operations.

Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. Although material, Credit risk is not included in the current assessment due to its widespread nature in the DeFi space. Even first order protocols that are backed by fiat reserves, also known as stablecoins, are prone to significant credit risk. We recommend managing credit risk through diversification.

Risk assessment of a protocol is helpful in decision-making for all counterparties involved: token holders, depositors, and borrowers.

Summary

Credmark maintains a register of market, liquidity and operational risks in DeFi. We quantify and monitor these risks and recommend appropriate risk mitigating strategies.