In this week’s installment of Insights into the RWG, we are pleased to showcase a weekly deliverable of ours that underscores our commitment to transparency and proactive risk management: The Risk Observer Checklist. This document is designed to provide to the core team a concise yet comprehensive overview of the various facets we monitor to ensure the ongoing security and stability of FiRM, our fixed-rate lending protocol, alongside the health of DOLA and other pertinent DAO activities.
Overview of the Risk Observer Checklist:
Information overload is the difficulty in understanding an issue and effectively making decisions when one has too much information about that issue, and is generally associated with the excessive quantity of daily information. The weekly checklist aims to procure data from the Analytics Working Group (AWG) in an effort to concentrate on key health indicators of Inverse Finance products. Color coded data enables us to identify and address potential concerns proactively and quickly over three week trends. Here’s what you can expect in each section.
1. Parameter Modeling with Price Impact Data:
In this section we look to study the interplay between various market parameters (Supply Ceiling, Collateral Factor, and Liquidation Factor, etc) within FiRM, employing sophisticated models to simulate liquidation and measure their efficacy in maintaining an integral and secure lending platform. This analysis was detailed in our last correspondence titled: Behind the Scenes: Collateral Parameterization, and, as explained there, is foundational in ensuring the overall health of FiRM.
As market conditions evolve, so do the risk profiles of various collaterals. We continuously monitor these changes and assess whether the current parameter settings align with the updated risk profiles. This proactive approach allows us to adjust parameters in a timely manner to safeguard the protocol against emerging risks. The insights gained from our parameter modeling are not just for immediate adjustments but also feed into a continuous improvement loop. By analyzing the outcomes of our parameter settings and their real-world impacts, we refine our models and strategies, ensuring that our approach to risk management evolves with the market.
2. Collateral Integrity Checkup:
Next, we undertake a comprehensive review of each collateral type featured in FiRM’s markets. Our approach is both qualitative and quantitative, blending numerical data analysis with qualitative insights from community interactions and protocol developments.
We actively monitor the Twitter feeds, Discord servers, and governance forums related to each collateral’s underlying protocol, helping us stay ahead of any announcements, updates, or community sentiments that could influence the collateral’s stability or perception in the market. We also keep an eye on changes made by competitor lending protocols that offer the same collateral markets which helps gauge whether FiRM remains competitive and aligned with industry standards.
On-chain, we quantify the available liquidity, and simulate max possible liquidation size (Supply Ceiling of a market multiplied by liquidation factor) for each collateral to determine ensuing price impact, which we plot week over week. We also utilize the Asset Scoring Model developed by the AWG, to assess each collateral’s risk profile. Below is an example for CVX.
This dual perspective of qualitative and quantitative measures provides a well-rounded understanding of each collateral’s current state and potential future trajectory. All findings from the Collateral Integrity Checkup are meticulously recorded and reported, contributing to the objective of ensuring the underlying assets backing DOLA remain robust and reliable.
3. DOLA Health:
In the DOLA Health section we provide a comprehensive snapshot of the overall health and stability of DOLA to the reader. This section is divided into three distinct snapshots:
- Liquidity Snapshot: Focusing on the liquidity aspects of DOLA. Key metrics recorded include:
- Total TVL: the amount of DOLA locked across all DeFi protocols, offering insights into its market adoption and utility.
- Avg DOLA Weight in LPs: helping us assess DOLA demand and stability in market conditions.
- Pairing Depth: The depth of non-DOLA liquidity available in the LPs that make up Total TVL.
- DOLA Balance: The depth of DOLA liquidity available in the LPs that make up Total TVL.
- Protocol Owned: The amount of DOLA owned by the protocol itself, which is indicative of the protocol’s capacity to manage DOLA’s stability and interventions if necessary.
- FiRM Lending Capacity Snapshot: Quantifying the lending capacity of DOLA within FiRM based on the Lending Capacity Model developed by the Treasury Working Group (TWG). It includes:
- Current Utilization: The percentage of DOLA currently lent out compared to what is safe to lend out according to the model.
- Room for Additional DOLA Lending Capacity: instructions to expand or contract into FiRM markets at the discretion of the Fed Chair.
- DBR Streaming Target Snapshot: providing insight into the monetary policy within FiRM. Based on the DBR Streaming Rate Target, this section provides actionable insights or recommendations for the Fed Chair on any adjustments needed to align with the protocol’s strategic goals as presented in the Lending Capacity Model.
4. FiRM Positions:
Providing an overview of the current state of DOLA borrowing and individual position health within FiRM. This section is designed to identify and monitor any potential risks or noteworthy trends in user behavior.
We meticulously track all active positions within FiRM, sorting them based on their proximity to the borrow limit. This helps us quickly identify positions that may be at risk of liquidation. We also track and sort positions based on their respective depletion date of their DBR, providing a clear view of when external actions might step in to replenish their DBR to maintain the health of their positions.
Overall, the FiRM Positions section functions as a risk mitigation mechanism, as the RWG can proactively identify and address potential issues before they escalate.
5. Multisig Hygiene:
The Multisig Hygiene section presents an up-to-date overview of the security and integrity of DAO controlled multisig wallets. These wallets play a pivotal role in operations and maintaining BAU at Inverse Finance.
Revoke.cash allows for quick examination of all current allowances, approvals, and total value at risk associated with our multisig wallets. This review helps identify any permissions that are outdated, unnecessary, or pose a potential security risk. Equally important here is verifying the integrity and security of the signers. This process involves tracking any changes to signers’ credentials and access methods. Any existing or new approval, allowance, or permission deemed unnecessary or risky is quickly flagged for further review. The idea being that a weekly cadence will help maintain a lean and secure multisig setup, reducing the likelihood of exploitation.
This section is therefore dedicated to auditing and maintaining the health of these multisigs, reviewing active allowances, permissions, funds at risk and to prevent unauthorized access and potential security breaches.
6. Bug Bounty stethoSCOPE:
This final section focuses on the oversight and management of the bug bounty program, a critical element in identifying and mitigating potential vulnerabilities. Here, we start things off by reviewing the contract scope list, which details all active smart contracts deployed by Inverse Finance included in the bug bounty program. As new contracts are deployed, they must be evaluated for inclusion to ensure that they are subject to the same rigorous security scrutiny as existing contracts. Just as important as adding new contracts is the removal of deprecated ones. The aim is to ensure that all critical and relevant contracts are covered.
Why This Matters:
The Risk Observer Checklist is more than just a document; it’s a testament to our dedication to maintaining a secure, transparent, and efficient protocol. By updating this document weekly for the team and sharing it with the community today, we aim to provide a deeper understanding of our risk management practices and encourage informed participation and feedback from all stakeholders.
Thank you for your continued support and commitment to our collective success.