[RFC] - Gro Protocol Risk and Rebalancing Framework
Author(s)/acknowledgements:
@Levi (Groda Pod)
Related discussion(s)
Voting Options
This proposal aims to ratify the adjusted Gro protocol Risk and Rebalancing Framework, namely:
- Strategy Allocation Process
- Frequency of Adjustments
The ultimate goal is to attain acceptance of the proposed framework, indicating its sufficiency and reliability. Additionally, ensuring that the protocol’s yield strategies are up to date, optimizing allocation, and managing risk are crucial.
The DAO has the following options to vote from:
- FOR: Accept the proposal
- AGAINST: Reject the proposal
- ABSTAIN: No opinion on the proposal
Summary
This proposal aims to formalize the already drafted yield strategies framework, making it more transparent and clear to understand, as well as extend it by providing clear differentiation between strategy-specific risk metrics.
Rationale
This proposal aims to tackle several critical issues within the current DAO framework landscape. Presently, the DAO operates with two distinct frameworks: the latest framework and the initial framework. However, these frameworks lack an integrated and cohesive structure, leading to confusion and inefficiencies in the overall process.
Concerns with existing solutions
- One primary concern is the absence of a unified rebalancing flow, which further exacerbates the disjointed nature of the frameworks. To address this, the proposal seeks to establish a well-defined and transparent rebalancing process. This formalization will foster improved coordination between the two frameworks, facilitating seamless adjustments to uphold balanced strategies consistently.
- Secondly, the existing frameworks exhibit a significant limitation by being tailored exclusively to the Curve protocol. This constraint hampers their adaptability to other protocols and strategies, limiting their potential applicability. To overcome this constraint, a central objective of the new framework is to transcend protocol-specific boundaries. By doing so, the framework will embrace a broader spectrum of protocols and strategies, empowering the DAO to explore diverse avenues for generating yields.
To rectify these concerns, this proposal aims to formalize the rebalancing flow. By establishing a clear and defined process, we can enhance coordination between frameworks and ensure regular adjustments are made to maintain balanced strategies.
Implementation
The Risk and Rebalancing Framework encompasses two major components:
- The selection of whitelisted Gro protocol yield strategies and the strategy allocation framework. These parts are integral to the overall framework and play vital roles in managing risk and optimizing allocation. The selection of whitelisted strategies involves carefully identifying and approving specific strategies that meet predefined criteria, ensuring a controlled and vetted approach.
- The strategy allocation framework determines the appropriate distribution of resources across the selected strategies, aiming for an optimal balance.
Together, these components form a comprehensive system for effectively managing risk and maximizing strategy allocation within the framework.
Whitelisted protocol strategies
Whitelisted strategies play a crucial role in forming the asset universe to which Gro protocol allocates assets. The primary objective is to ensure that these strategies adhere to all the necessary risk metrics while also enabling Gro protocol users to access high yields. By carefully selecting and approving whitelisted strategies, the protocol establishes a controlled and vetted set of investment options.
Gro DAO voted (find all votes here) on protocol strategies and whitelisted the following strategies that the Risk Balancer could use to allocate funds based on yield and risks.
Pools:
Protocols:
- Aave Lending
- Compound Leveraged
- Curve Finance
- Convex Finance
Risk Framework
The GroDAO Risk Framework entails a meticulous examination of protocol strategies across a spectrum of factors. This framework currently serves as a methodical conduit for the provision of data to be used by DAO members and protocol users. The objective is to facilitate their assessment of risks associated with the strategies.
Encompassing two categories, namely protocol-specific risks and strategy-specific risks, the GroDAO Risk Framework ensures a comprehensive comprehension of potential vulnerabilities within these domains.
It’s noteworthy, however, that the framework operates based on data collected at a specific point in time. Therefore, the relevance of its outcomes might diminish if the underlying factors undergo significant changes. This underscores the importance of recognizing the dynamic nature of the elements under evaluation.
Protocol-specific risk metrics
The primary emphasis of this evaluation centers around smart contract intricacies as well as market and financial hazards.
- Length of time a protocol is live on mainnet: the longer a protocol has been around the more time for its code to be examined by hackers
- Audits: more audits decrease the likelihood of flaws in smart contract code
- Bug bounty: a higher bug bounty incentivises more ‘white hat’ hackers to have reviewed code
- Protocol TVL: higher protocol TVL increases the potential gain for hackers, and therefore incentivizes more code examination
Strategy-specific risk metrics
Delving into the realm of strategy-specific risks reveals a distinct category closely tied to the unique attributes of each strategy. Presently, GroDAO boasts two prominent cohorts of strategies: Curve Liquidity Provision and Overcollateralized Lending. Each of these strategic avenues presents its own set of specialized risks, intricately interwoven with the strategic objectives and operational nuances of the respective group.
Curve Liquidity Provision
Stablecoins also cover:
-
Stablecoin Collateral Stablecoin type: this explains how a stablecoin keeps to peg, whether backed by fiat or crypto assets, and whether overcollateralized or fractionally backed
-
Stablecoin market cap: this is a measure of the market’s view of safety (as a higher market cap implies more participants trust the coin) and available liquidity
-
Curve 3CRV (meta)pool depth: high pool depth shows further market confidence, and also deeper liquidity implies lower volatility
-
Balance-adjusted Amplification Factor (Chi): shows the pool A factor, adjusted by the imbalance of the pool. The formula looks as follows: \chi=\frac{A x y}{(D / n)^n}, where χ is Chi, A - A factor, x, and y - pool token balances, D - the total number of tokens in the pool.
-
Pool Imbalance Factor: shows the ratio between Chi and A. 1 signifies a meticulously balanced pool, while proximity to 0 indicates increasing pool imbalance.
Overcollateralized lending
- Total Supply: The aggregate sum of assets supplied by lenders to the pool.
- Utilization Rate: The proportion of the total supplied assets that are actively being utilized by borrowers:
- Bad Debt Ratio: The percentage of outstanding loans within the overcollateralized lending pool that are deemed irrecoverable or defaulted upon.
- Whale borrows concentration: shows the clustering of loans within the protocol, with “whales” defined as addresses holding over 1% of borrow shares.
Furthermore, to ensure the continued effectiveness of the risk assessment process, the strategy whitelist will be reviewed and updated on a quarterly basis. This review will be conducted either by the core team or through community suggestions, allowing for a comprehensive evaluation of new strategies or adjustments to existing ones.
Moreover, in the event of an emergency, the whitelist can be updated promptly. This flexibility is crucial to address unforeseen risks or rapidly evolving market circumstances that may require immediate action.
Allocation and Rebalancing Process
Prioritization Process
The Prioritisation Process in GroDAO framework is thoughtfully divided into two distinct parts, ensuring a comprehensive approach to strategy selection and capital allocation.
1. Strategy-specific Scoring System
Implementing all whitelisted strategies at once creates very high gas costs as a share of yield (high double-digit % ). For an optimal risk vs yield profile, the below whitelisted strategies are currently used to generate yield. This keeps Vault exposure to any stablecoin at or below 50% even after applying Vault leverage; in doing so, Gro protocol can achieve diversification without spreading liquidity too thin. At a higher protocol TVL, there would need to be a DAO vote to increase this to more strategies.
Prioritization of whitelisted strategies for deployment is based on the strategy-specific scoring system and projected strategy yield. Yield takes a higher weighting; in case of an equal result score, the strategy with the higher yield would be prioritized over the other.
Curve Liquidity Provision
Curve pool depth (1x weighting)
Pool depth is >2x Gro Protocol TVL = 1
Pool depth is >1x Gro Protocol TVL = 2
Pool depth is <1x Gro Protocol TVL = Strategy is not selected
Balance-adjusted Amplification Factor (1x weighting)
Ranked across all whitelisted strategies within a protocol
Pool Imbalance Factor (PIF) (1x weighting)
PIF ≥ 0.9 = 1
0.89 > PIF ≥ 0.75 = 2
0.75 > PIF ≥ 0.5 = 3
PIF < 0.5 = Strategy is not selected
Overcollateralized Lending
Total Supply (1x weighting)
Total Supply ≥ 2x Gro Protocol TVL = 1
Total Supply ≥ 1x Gro Protocol TVL = 2
Total Supply < 1x Gro Protocol TVL = Strategy is not selected
Utilisation Rate (2x weighting)
Utilisation Rate < 95% = 1
Utilisation Rate > 95% = 2
Utilisation Rate > 99% = Strategy is not selected
Bad Debt Ratio (1x weighting)
Ranked across all whitelisted strategies within a protocol
Whale supply concentration (1x weighting)
Ranked across all whitelisted strategies within a protocol
All Whitelisted Strategies
Strategy yield (3x weighting)
Force-ranked across all whitelisted strategies
2. Apply a waterflow allocation
The waterflow allocation method, a key component of the framework, is designed to ensure an effective and controlled distribution of capital among the selected strategies. This methodology takes into account various allocation parameters to optimize liquidity provision and risk management. There are some predefined allocation parameters namely:
- Pool Concentration Threshold: 10.00%
- Ensures strategies do not have an excessive concentration in the pool, mitigating slippage risks.
- Maximum Pool Allocation: 30.00%
- Strikes a balance between diversification and liquidity fragmentation, optimizing capital allocation across multiple strategies.
- Reserves: ≥ 5.00%
- Maintains a sufficient reserve allocation to provide stability and act as a buffer against market fluctuations.
- Minimum $ Allocation in strategy: 500,000$
- Creates reasonable minimum allocation where the yield is not eaten by transaction fees
The allocation process follows the following sequence:
- Strategies are sorted based on their risk scores, with the highest-ranked strategy at the top.
- Starting from the top-ranked strategy, capital is allocated while adhering to the defined allocation constraints.
- The process continues until all available capital is allocated across the strategies.
- If, after the allocation process, the remaining reserves are less than 5%, a scaling mechanism is implemented. This entails scaling down the weights of the previously allocated strategies to ensure an adequate reserve allocation.
This comprehensive approach to strategy ranking and capital allocation allows for a balanced and risk-managed distribution of capital, promoting diversification while maintaining sufficient reserves for stability.
Here is an example allocation table showcasing the distribution of capital among the selected strategies based on the waterflow allocation method and defined parameters. You can use the following file to track the current developments.
Periodic Adjustments and Emergency
To ensure the responsiveness of the allocation strategy, quarterly adjustments are scheduled, allowing for periodic optimization based on changing market conditions and risk assessments. In the event of an emergency, similar to the governance proposal, immediate adjustments can be made to address urgent concerns.
The submission date and next steps
- Date of Submission: 2023-08-22T00:00:00Z
- Move proposal to Snapshot if RFC feedback is implemented and there is sufficient support: 2023-08-27T00:00:00Z (at the earliest)
Once this framework is approved, the DAO can begin implementing its principles and make necessary adjustments to the allocation strategy as needed. These principles will also extend to treasury risk management, ensuring that both protocol strategies and treasury selection adhere to the same procedures.
Signaling Vote
Please indicate below whether you are FOR, AGAINST; or have no opinion (ABSTAIN); on this sub-proposal.
- FOR: approve the proposed framework
- AGAINST: do not approve the proposed framework
- ABSTAIN: no opinion on this proposal
- FOR: approve the proposed framework
- AGAINST: do not approve the proposed framework
- ABSTAIN: no opinion on this proposal