ThefollowingisaguestarticlefromVincentMaliepaard,MarketingDirectoratIntoTheBlock.
Economicriskshaveledtonearly$60billioninlossesacrossDeFiprotocols.Whilethisnumbermayseemhigh,itonlyreflectslossesattheprotocollevel.Theactualtotalislikelymuchlargerwhenfactoringinindividualuserlossesduetovariouseconomicriskfactors.Thesepersonallossesoftenarisefromvolatilemarketconditions,complexinter-protocoldependencies,andunexpectedliquidations.
UnderstandingEconomicRiskinDeFi
EconomicriskinDeFireferstothepotentialfinanciallossduetoadversemovementsinmarketconditions,liquiditycrises,flawedprotocoldesign,orexternaleconomicevents.Theserisksaremulti-facetedandcanstemfromvarioussources:
MarketRisk:Volatilityinthevalueofassetscanleadtosignificantlosses.Forexample,suddenpricedropsincollateralizedassetscancauseliquidationevents,leadingtoacascadeofforcedsellingandfurtherpricedrops.
LiquidityRisk:Theinabilitytoquicklybuyorsellassetswithoutcausingasignificantimpactontheprice.InDeFi,thiscanmanifestduringamarketsell-offwhenliquiditypoolsdryup,exacerbatinglosses.
ProtocolRisk:ThisriskarisesfromflawsorinefficienciesinthedesignofDeFiprotocols.Impermanentloss,oraclemanipulation,andgovernanceattacksareexamplesofhowprotocol-specificriskscanmaterialize.
ExternalRisk:Factorsoutsidetheprotocolsuchasactionsbylargemarketplayersorchangesinmacroratesandconditions,canintroducesignificantrisksthatareoftenbeyondthecontrolofusersoraprotocol.
TheLayersWithinEconomicRisk
InDeFi,economicrisksarepervasive,buttheycanbeunderstoodontwodistinctlevels:protocol-levelrisksanduser-levelrisks.Distinguishingbetweenthetwohelpsusersbetterdefinetherisksthataffecttheirstrategiesandmonitorkeysignalstotakepreventativeaction.
ProtocolLevelRisks
Protocolsimplementsafeguardsthroughvariableparametersdesignedtolimitexposuretoeconomiclosses.Acommonexampleisthelendingandborrowingparameterssetbylendingprotocols,whicharetestedandcalibratedtopreventbaddebtfromaccumulating.Thesemeasuresaregenerallyutilitarian,aimingtoprotecttheprotocolfromeconomicrisksonabroadscale,benefitingthelargestnumberofusers.
Whilemanagingeconomicrisksisbecomingincreasinglyimportantforpreventinglarge-scalelossesattheprotocollevel,thefocusisnarrow—ontheprotocolitself.Theydon’taddresstherisksthatindividualusersmayintroducebymakingeconomicallyriskydecisionswithintheirownstrategies.
UserLevelRisks
User-levelrisksareoftenreducedtotheamountofleverageanindividualtakesinlongorshortpositions,butthisonlyscratchesthesurface.Usersfacearangeofadditionalrisks,suchasliquidations,impermanentloss,slippage,andthepotentialforlockedlendingliquidity.Theseindividualrisksdon’tusuallyfallunderthescopeofprotocolriskmanagement,butcanhaveasignificantfinancialimpactonindividualusers.
Thegoodnewsisthattheseuser-leveleconomicrisksarehighlyactionable.Byunderstandingtheirownriskprofile,userscanactivelymanageandmitigatetherisksspecifictotheirstrategy.ThispersonalizedapproachtoriskmanagementremainsoneofthemostunderutilizedtoolsavailabletoDeFiparticipantstoday.
TheinterconnectednatureofrisksacrossDeFiprotocols
EconomicriskmanagementisessentialwhenaddressingrisksthatspanmultipleDeFiprotocols.Whileprotocolauditsandriskparametersstrengthenindividualprotocols,DeFiusersoftenengagewithmultipleprotocolsintheirstrategies.Thismakesuser-levelriskmanagementcrucial.
Eachadditionalprotocolorassetintroducesnewriskfactors,notonlyfromthatnewprotocolbutalsofromhowtheseprotocolsinteract.Evenifeachprotocolissecureonitsown,riskscanemergefromhowyourstrategycombinesthesedifferentprotocols.
Forexample,imagineascenariowhereauserutilizesaLiquidRestakingToken(LRT)ascollateraltoborrowanasset,whichisthendeployedinaliquiditypool(LP)onanexternalautomatedmarketmaker(AMM).Theprimaryconcernmightbetheleveragedborrowingposition,butthereareadditionalrisks.ThestabilityoftheLRT’spegcouldimpactliquidationinthelendingprotocol,whilethecompositionoftheLPcouldaffectslippageandexitfees,potentiallycausingcapitallosswhenrepayingtheloan.Theseinterconnectedrisksdon’tfallunderanysingleprotocol’scontrolandarethereforebestmanagedbytheuser.
StepstoUnderstandandManageEconomicRisk
ManagingeconomicriskinDeFirequiresawell-thought-outapproach,asthecomplexityofmulti-protocolstrategiescanintroduceunforeseenvulnerabilities.
DeepDiveintoProtocolMechanics:Understandingtheunderlyingmechanicsofaprotocolisthefirststepinidentifyingpotentialeconomicrisks.Investorsanddevelopersshouldscrutinizetheeconomicmodels,assumptions,anddependencieswithintheprotocol.
MonitorMarketIndicators:Keepinganeyeonmarketsignals,suchasassetvolatility,liquidity,andoverallsentiment,isessential.Analyzingon-chaindataspecifictotheprotocolsyou’reusingisapracticalwaytostayinformed.Forinstance,ifyou’reengagingwithalendingstrategyonBenqi,monitoringthehealthfactorofloansontheplatformiscrucial.Thisprovidesinsightsintohowstableyourlendingpositionisandhelpsyouanticipatepotentialissuesbeforetheyescalate.
Createaholisticriskprofile:Understandinghowinterconnectedrisksmayimpactyouroverallstrategyiskeytoeffectiveriskmanagement.Whileindividualstrategiesvary,riskanalyticscanassistinidentifyingareasofconcern.Forexample,ifyou’reusingaLiquidRestakingToken(LRT)ascollateraltoborrowassets,monitoringthestabilityoftheLRT’spegisessentialtoavoidunexpectedliquidations.Suddenspikesorvolatilityinthepegcouldsignalaneedtotakeprecautionarymeasures,suchasreducingexposureorincreasingcollateral.
Insummary,managingeconomicriskinDeFiisaboutbeingproactive.Byunderstandingprotocolmechanics,keepingaclosewatchonmarketindicators,andbuildingaholisticviewofpotentialrisks,userscanbetternavigatethechallengesofmulti-protocolstrategiesandprotecttheirpositions.
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