A new week, a new installment of Insights into the RWG! We’re back today to talk about our risk assessment reports. You may have seen them archived in the RWG dedicated Gitbook or referenced and linked in governance proposals. While our risk assessments generally serve to identify, evaluate, and prioritize a wide range of risks associated with entities, protocols, collaterals, or initiatives within our ecosystem, we will focus this post on assessments targeting new collateral markets on FiRM. By sharing our methodologies we aim to continue this initiative to inform you, the reader, of our risk management strategies and decision-making processes. Past installments of this series include:
Risk assessments are compiled into reports which lead to the provision of recommendations for collateral market parameters such as supply ceiling, collateral factor, daily borrow limit, and liquidation factor, to name a few. These recommendations serve as a foundation for informed discussions among core contributors and community members alike within the Inverse Finance DAO.
To ensure efficiency, thoroughness, and transparency in our processes, the RWG has developed the Collateral Onboarding Procedure. We’ve identified 8 steps that make up the procedure; each meant to minimize any oversight in evaluating the potential risks associated with new collaterals and determining their suitability for inclusion in our lending protocol. These are explored below.
Step 1: Establish Line of Communication with Core Team
Establishing a line of communication with the core team of the underlying protocol is an essential first step in the Collateral Onboarding Procedure. Here, the RWG aims to gather comprehensive information essential for conducting both qualitative and technical risk assessments. Discussions may include the nature of the collateral, its underlying protocol, potential risks, and any relevant updates or developments. Additionally, this communication allows for the alignment of objectives, clarification of expectations, and establishment of mutual understanding regarding the assessment process and its outcomes. Channels remain open well beyond the original scope of onboarding the collateral is completed, as further synergies are explored.
Step 2: Complete Qualitative Risk Assessment
The qualitative risk assessment involves a comprehensive review of the various aspects essential for understanding the broader risk profile of the collateral, including the underlying protocol’s organizational structure, its history, and overall reputation and influence. The robustness of the protocol’s governance mechanisms, the composition and integrity of its multisig structure, and past and active strategic partnerships and collaborations are noted.
Finally, RWG examines the scope of contracts in the protocol’s bug bounty program and lists all past audits performed on contracts pertaining to both the collateral and other products developed by the underlying protocol. All referenced material is gathered in a Useful Links section.
By considering these qualitative aspects, RWG gains insight into the broader risk profile of the collateral and its potential impact on our ecosystem.
Step 3: Complete Technical Risk Assessment
The technical risk assessment involves a comprehensive evaluation of the collateral to ascertain its suitability for integration into FiRM. This section covers several critical aspects aimed at analyzing the contract code, oracle integration, collateral analysis, utility, competitive landscape, and parameter modeling. Here’s a quick breakdown of each component:
Contract Analysis: Reviews the Smart contracts associated with the collateral, including the ownership and operational structure of the contract (admin roles and related permissions), and whether the contract is upgradable and immutable, along with any mitigation strategies in place to manage associated risks.
Notable Audit Findings: Highlights any significant findings from previous audits and ongoing assessments, along with proposed mitigation strategies to address any identified vulnerabilities.
Oracle & Escrow Analysis: Assesses the reliability and accuracy of the price feed oracle, backup feed mechanisms, and associated liquidity pools. Also, evaluates the implementation of escrow mechanisms, including voting requirements and claim delegation processes.
Collateral Analysis: Recaps various token statistics such as price, circulating and max supplies, locked value, market cap, on-chain liquidity, and price impact modeling.
Utility & Use Case: Investigates the utility and use case of the token, assessing its practical applications and value proposition within DeFi.
Asset Score: Calculates an asset score based on various components such as market cap, trading volume, price volatility, token distribution, project fundamentals, and utility.
Competitive Analysis: Identifies competitive markets and implementations, competitor oracle solutions, and notable competitor failures to contextualize the collateral’s position within the broader market landscape.
Conclusion: Provides a summary of key findings from the technical risk assessment, along with parameter modeling and recommendations for deployment.
Step 4: Internal Review of Technical Assessment
Before proceeding further, RWG conducts an internal review of the technical assessment findings.
This peer review process involves sharing and discussing the report with other core team members, namely PWG (Product Working Group), to validate assumptions and ensure the robustness of the assessment. Any discrepancies or areas of uncertainty identified during the review are addressed, and additional analysis may be conducted if necessary.
Once a collateral successfully passes through steps 1-4, it progresses into the development pipeline for integration into the FiRM protocol. The PWG gets to work, employs a smart contract review process, and decides which external reviewers/auditors to involve.
Step 5: Finalize Parameter Modeling and Recommendations
With the collateral approved for integration, RWG shifts its focus towards parameter modeling and formulating recommendations. RWG analyzes the latest on-chain liquidity values, and other risk factors to determine optimal parameter settings for the collateral. Recommendations include suggested values for parameters such as the supply ceiling, collateral factor, daily borrow limit, and liquidation factor, among others.
For more on this process, refer to the aforementioned Behind the Scenes posts above.
Step 6: Final Copy Full Risk Assessment
A comprehensive risk assessment document is compiled, incorporating all findings as well as revisions from both the qualitative and technical assessments. This document serves as a reference for stakeholders and decision-makers during the collateral integration process.
Step 7: Draft Proposal Add Market Checklist
Relevant smart contracts are deployed and a draft proposal outlining the integration of the collateral into FiRM is prepared. The proposal includes a market checklist (shared below) detailing the necessary steps and considerations for the successful deployment of the collateral.
Step 8: Internal Proof of Reviews, Ship
Before launching the proposal, on-chain proof of reviews are posted from members of at least two working groups at Inverse Finance (with a requirement that one be either a member of the RWG or PWG). See example below.
Upon completion of the review process, the proposal is finalized and posted to Inverse Finance’s governance forum, where community members and relevant stakeholders alike have the opportunity to read through the findings of the risk assessment and identify any oversights or areas requiring clarification. After a minimum of 24 hours on the forum and after leaving no stone unturned, the proposal goes live for voting. DAO voters ultimately decide the fate of proposals at Inverse Finance.
Conclusion
So to recap, 8 steps make up our Risk Collateral Onboarding Procedure.
By enforcing this structured approach, RWG aims to ensure that new collaterals added to FiRM have been thoroughly assessed, that DAO members are provided with the necessary information to make an educated decision on how they should vote, and, if the proposal passes, that the new collateral be integrated into FiRM in a manner that prioritizes risk management and protocol stability.
Thank you for your continued support. We’ll catch you next week.