Don't Trust, Verify: Risk Management in Web3

Transcript

hello everyone joining our amazing education Symposium webinar my name is tilma I chair the working group education at the crypto Valley Association which is uh people say the largest nonprofit Association within the crypto and blockchain space What do we do the association consists out of SE several working groups groups which are working on on different topics such as regulation taxation startup security legislation or regulatory aspects and of course education because if you don't know how things know then you don't know and people need to teach you what do we do at the working group education we

have several initiatives in and around Education and Research this includes webinars this includes offline research Symposium and our Flagship project which is our research Journal which got launched in 2022 and how this works is that we annually Define a specific Topic in the crypto and blockchain Industry mainly to go overcome current issues and problems then we would invite dedicated authors or authors in this in this case can apply to hand in research findings according to that pre predefined topic we would then score those papers to

reach an academic level that you can recognize the those papers in the professional world combine them or compile them in some sort of research journal and give it back to the industry in 2022 we started with opportunities and challenges in the crypto space relatively broad uh topic to invite all sorts of authors it was a success we continued in 2023 with don't trust verify risk management in web 3 and the idea initially from this U came because of the crash down of several crypto projects in the past years so there was the appetite and of course the understanding of the industry that this

this new blockchain or crypto fintech industry has comes with many risk which we need to overcome today we have the first batch of the best authors who handed in their research papers and they will today present their research findings we have backgrounds from technology people handed in or authors handed in papers with the legal background all in and around crypto and risk management that being said I want to highlight that also in 2024 we will have a research call or call call for papers with the topic of the future of payment and settlement networks and how stable coins play a role but more to

this in a few weeks we will announce and kick off and start the same process for this year now let's dive into the webinar we have a range of authors who then now first present their main thesis and then present and and and talk about the conclusions they have in this specific area followed by the one or two minute uh question and answer around Now ladies first please Ramona uh I would like to invite you first on stage if you want to give a oneliner introduction who you are and then U I have the slides ready for you to present if you want me to switch the slide just say next and I flick over so microphone over to

you thank you so much telmer um hello everyone I'm a little bit of an odd do here because I'm based in a Cayman Islands and I yet um I'm I'm here in a crypto Association event um but uh this is very very important topic in terms of risk management uh my focus was on Dow's um new areas of research as the personal background I am a internet lawyer um I come from a traditional background of uh Corporate Finance uh and investment funds and I I went down to Rabbit Hole of of blockchain projects in Dows and now I'm looking at um how Dows are really an experiment in in the evolution of organizations um so that we can

evolve towards more open systems um and and systems which are across borders I'm normally based in the Cayman Islands but I do have a background in European law as well so I'm not not that far um next slide please so that as as experiments have been recognized by by several people including um authors um I I started the research with uh really an inventory of what was out there in terms of Publications about Dows issues regarding Dows both in terms of risk management and in terms of governance and and what I found by by taking this um inventory is that Dows were both highly

experimental this is very very early stage and also the knowledge was very fragmented very few meta studies uh very few really um cross-sectional studies or International Studies um most of the papers were looking at Dows from from very specific Focus points so this this research was initiated for the um crypto valy Association uh Journal but then it was continued so this is the part to the right you can see the four major conclusions of the continuous of this conversation uh we had the workshop in January this year and then we had a follow-up presentation at e Denver so so DS are very different animals because

the patterns of human aggregation that we're seeing right now are actually very different and we're just starting to understand the patterns um so this is a very very important factor because different different um structures different animals would behav in very different ways and um they will have very novel risks so we're talking about emergent risk we're talking about unknown unknowns this is a very very uh risk risk prone area and then legal rappers are currently inadequate because there is no real tie between the um consensus mechanism and the corporate governance of the traditional legal rapper uh we're starting to see an evolution of this with the Wyoming dunas for example this year but they were

still very early stages next slide please so so how can we apprehend this in practice and then um coming from a traditional risk management uh background is as as part of a chartered governance professional I I I I try to apprehend in terms of where would would we be on this how to apprehend risk and Dows so so going from a more siloed approach that that currently exists focused on technical risk more contract risk and then Financial risks um how can we get to a more um holistic uh view like the Enterprise risk management but decentralized and what would be the methods that we could use to apprehend risks so I narrowed it down to four types of methods um the SWAT the

scenario planning dely method and the past analysis so these are recognized in literature as as being the some some of the best methods to apprehend unknown risks emergent risks and and um you can read more about it in the paper but really the SWAT can be a very accessible very participa poor very Democratic process and an ongoing iteration scenario planning can be used in more uh specific context long-term planning exit games end games so forth Deli method I think it would work particularly well in Dow Deli method is is an anonymous group of experts well the experts are identified but they provide their opinions anonymously in several rounds until they reach a sort of something

something uh joint so it's a co-creation and then the pest analysis is really about the environmental the macro environmental factors that that Dallas needs to consider so these four methods would be particularly relevant for DS um next slide please so going through that and also whatever I could find in the literature about risks in Dows and also generally in Dows in debates in like articles on the web right um I try to uh create a risk taxonomy that that could be a starting point right so this is not like and you know this is just a starting point um what I would like to highlight here is that uh we have the governance

risks in the first place these have been recognized in literature have been discussed um I mentioned voting like voting apathy I'm discussing in the paper voting appey civil attack um centralization or government imbalance which is the major area of concern governance attacks incentive misalignment because not everybody's building the their their toomics properly and then the vote buying so these are have been recognized and and there is literature on this there are discussions on this um Financial risks and Technical risks have been extensively discussed these are um the most frequent ones that we see addressed by dowo so they were left out of the research paper um I'm focusing on operational risks um because of the decentralization Dows have um a

management Gap and the Strategic Gap and the management Gap leaves them exposed to more operational risk than traditional organizations would have right um there are no supporting systems not no good on boarding no business continuity generally and like there are a lot of issues there um I separated legal and Regulatory risks and AML risks because really um there could be different different levels different um measures to address these I'm not going to be overly focused on this participant risk I want to emphasize because it's a really a new area that traditional organizations do not have and therefore we do not have the knowledge how to properly apprehend and address these risks and they're very important Dows would not be able to attract valuable

contributors unless they can actually address these properly um and then more strategic risk and like reputational Risk reputation could be seen as a variant of strategic but I I separated it because this is still very experimental early stage very controversial sometimes um so I thought that it would be best to keep them separate next slide please so in practice um okay so this is a bit of a block of text but in practice um how can we address these in a in a sort of decentralized context and um some easy ways to do this would be to promote organization-wide learning and discussions about risks um creating some Guardian roles like within the community people with specialize skills in risk

management or specialized training in Risk Management we have like certain certifications depending on the uh size of the Dow the maturity of the Dow they would have different needs but essentially we could build a risk management framework for dowas a decentralized ERM um if you will based on the risk taxonomy Guardian roles and and building a a risk dashboard to feed these areas of information so that the community remains uh aware of what's going on who is addressing what and then the guardian roles could be very useful in particular because they could have um weighted voting or stop Gap measures which not centralize right they're not pushing towards centralization they're

meant only to protect the Dow to protect the project so separating this functions from from other administrative function um could be very useful to maintain the centralization while while addressing these area so this is in like very briefly um the gist of the research paper and I would encourage you to go explore in there it's full of the references that I could find and then of course this is just the beginning of the conversation I see that there are no open questions but I would like to invite it for a minute thank you Ramona to give a brief overview of your fantastic work you have been submitted to to our research Journal so to the audience please feel free to chat in the chat window are the open question Ramona

happy to answer if there are any so whil we we wait for the questions I I also believe there's a lot of work to do when it comes to DS right in the tradition Financial world people just slowly now to understand BTC eth right now we got some ETFs there so the traditional world is more and more aware of you know blockchain but of course there are much more applications such as Dow so actually uh the I what I like the the the proposition you had of of some sort of certification or standardization right I I believe we still a little bit you know further away from this but looking into the future they they they I think it can make sense

you know to understand this sort of organization better then actually when we look at the the next set of speakers um that their paper is called fully onchain Dows on the internet computer and um when there are no more questions come I would be very interesting for B and Lara to understand exactly how Dows would work on the the ICP Network and maybe overcome those those challenges using your specific technology it looks like be fascinating if there I I I would like to invite follow-up questions via messaging or reaching out directly um I understand the timing is a bit short and there is

much to digest so so perhaps uh uh Moving on but um certainly continuing the conversation if people are interested like I'm I'm very keen on that absolutely please Lara and BJ um it's your time to shine thank you very much so I'll do the presentation today on the fully own chain Dows on the internet computer protocol uh but this is Joint work with ver who is also in the call and probably ready to answer your questions in the chat so indeed our paper was also about Dow but uh maybe we are more um yeah tackling a more technical question and

then we'll see that also comes into play with risks so if you can go on the next slide please um as many of you probably know the internet computer protocol or ICP for short is a blockchain and uh as many other blockchains it consists of many different layers so on the lowest layer basically there are is the hardware or the computers that are running the protocol and then on top of that there's a protocol defining how these notes can exchange messages and communicate with each other and arrive at a consensus what is the content of the blockchain and then if you go on the next slide um on the top layer there are the smart

contracts that can be deployed by some users and Ed and interact with by other users so naturally over the time we might want to evolve this protocol for example we want to achieve that messages can be exchanged quicker that there is you know additional storage for smart contracts or maybe we just want a fix box so a question arises is who decides when and how to operate the protocol and in some other blockchains um how this happens is that every person that owns such a computer on the lowest layer basically has to update the software of this computer and this

hopefully happens roughly at the same time so that the full protocol is upgrade on the internet computer protocol uh it there is a little bit a different approach and all of this is governed by a decentralized autonomous organization or or Dow for sure so if we go on a next slide we see that um this Dow itself also consists of smart contracts that users can interact with and it really controls the full internet computer how this this works is that anyone can become a participant of this Dow by um staking some tokens and then they can make

suggestions how the protocol should be evolved so such suggestions are called prot uh proposals and then other uh users who also have stake tokens can participate and collectively make a decision whether a proposal should be adopted or rejected and one specialty um on that not true for all the DS um which is the case on internet computer is that once proposals are decided they are executed fully on chain so this means that there doesn't need to be a person for example looking oh what is the decision and then going somewhere and implementing something but rather all of this is already integrated so once a decision is made it will be automatically executed

by the blockchain itself and this is now kind of coming back to the risk question right why why is this beneficial to have such a dow fully on chain so one advantage is that there cannot be Forks uh so it's always a clear decision um when a protocol should be updated and what it should be updated to and also the fact that um there is no human intervention required to basically realize decisions has huge advantages in terms of it prevents human errors but maybe even more importantly it takes away the trust right the trust TR effect we don't have to trust the centralized party or person to actually execute What was decided because once something is

decided it will happen for sure basically so if you go on the next slide um next I would like uh so what we did in the paper basically is reflect a little bit of what are actually the features on the internet computer that facilitate this onchain Dows and in the remaining time I mean this is just an overview but I want to give you a little bit an idea of some of these features um that are helpful to achieve this so the first one is a protocol embedded node upgrades I've mentioned that on some other blockchains to update the protocol itself all the the people who run a computer basically have to uh

collect or have to individually update the software on the internet computer um once the Dow makes decision that the protocol should be evolved all the note machines on the very low layer automatically implement this update themselves so they're basically observing the decisions and then they pull the new software and update themselves this is also connected to a little bit on what's on the next slide um to the fact that um the IC distinguishes between governance participants and note providers so note providers are basically the owners of these computers that run the software in some data centers but those are not the

people deciding what software is run on the machines rather as we have just mentioned this decision is made by the governance participants and this has the advantage that now the decision what is run is made by governance participants who have some stake right in the system and therefore have a long-term commitment and hopefully make good long-term decision ISS for the whole platform um if you can go to the next slide another feature that helps with onchain Dow is that the smart contracts on the IC are by default mutable so each smart contract can be upgraded and this includes the canisters that implement

the Dow itself so let's say for example the community would like to change the rules of the governance itself for example they say oh we need a bit more time making decisions proposals should have a longer voting period this can be done by just uh proposing that the Dow itself is upgraded and once again when the decision is made this will be done fully automatically and on the next slide we also see uh basically um a protocol feature that helps enabling DS that are very active h because um having dat daily proposals also of course requires a lot of computation um and storage and

those costs are rather low on the internet computer compared to other blockchains the internet computer has so-called reverse gas model where developers basically fuel their smart contracts with so-called gas and then users can just seamlessly interact with these smart Contra uh contracts kind of like they uh would interact with the normal website so it's not really a difference to be seen compared to web two applications in addition to that the main down that governs IC is subsidized by the platform so this means that the voting itself doesn't actually uh cost anything so the voters can participate for

free and finally on the next slide another feature that helps with just making a lot of decisions is so-called liquid democracy so by now you notice that a lot of the decisions that are made are very technical right for example what software should uh the blockchain be upgraded to so naturally not all the users have time and maybe the knowledge to make all of these decisions to help with that the internet computer has a so-called liquid democracy which means that every voter can decide whether they want to make a decision themselves or delegate their voting power to another uh governance particip that they trust and this now achieves that um more

people can participate either by actively voting or just by making themselves the choice who they want to trust and delegate their voting power to and this is also one of the features that just enables the amount of proposals and the very technical decisions to be made now to wrap up on the next slide I want to give you a sneak peek how this looks uh in action so this is the nns tab where everyone can look into and this uh this page shows the different Dows that are in the internet computer and the top one is the Dow that actually governs um the blockchain that we have seen here if you click on a proposal uh this will be

shown on the next slide um you then see what this proposal is about you see how many votes have already been submitted this is a proposal that was just submitted so there are no votes yet and a vter can then um decide to adopt or reject the proposal so I'm aware that this was just a sneak peek and if you're more interested in seeing what proposals are out there and how um the governance Works uh you can find this uh QR code will lead you to the nns tab and especially the proposal page um and I'm happy to take questions also if there later upcoming in the chat thank you very much for your attention thank you you very much

handing up this fantastic paper and I think this really describes how the ICP or how how how this work would work on the ICP Network I personally find it very interesting I will definitely dig into so thank you for your valuable contribution let's welcome thanks we have a full room uh also for everyone please feel free to ask questions if they are non coming we move on to the next presenter this will be Frances chesco and Marco with their paper on risk management standards for crypto asset service provider I'm now looking very much forward uh about the

crypto asset service provider you mentioned in your papers and the three key areas which you define need uh how say Improvement meaning clearer classification of tax taxonomy and tokens uh due diligence and as well the risk assessment so please Franchesco and Marco looking forward to to hear now more from you thank you thank you Kilmer uh so just briefly introducing Mar and I are the founders of not your money it's an educational and advisory platform for individuals and professionals seeking to embrace crypto with security and confidence and this paper you say is is centered around the The crucial role played by casps in uh and

recommendations we propos in ensuring consumer protection and and with that upgrading the perception of trust in this industry so obviously we're here in the crypto Valley we're in the crypto space we love crypto and it's incredible foundations for a prosperous new era of of Finance but let's be honest this space this industry's had a far from impeccable track record uh We've we've seen all sorts of mishappenings and often we do look at this industry more like a casino than a safe and sec Ure Marketplace uh just again to keep in mind we're looking at this from an end consumer perspective seeking to deploy Capital um and asset in in this wide crypto space um and we believe that if

if if this industry is really serious about challenging the status quo challenging Trad F through Cutting Edge technology uh trustless decentralized infrastructure then we really have to do much uh better we really need to earn that in that that trust that brought us here in in the first place maybe if we can just uh move to the next slide so we want to focus on the role played by C so for as much as there are decentralized promises decentralized Finance uh defi sort of platforms and protocols really the onramp to crypto is through casps right so where is where is where are the assets coming from where do use a go to access crypto they they go through

Market participants we call them casps which effectively are just the Gateway between consumer and their assets and projects the the the the vast world of uh crypto Investments and that is a very broad murky universe that is often uh poorly uh understood and as such we believe that uh these these Guardians these these cast are not just Market guard um Guardians they're not just uh or actually they more than Market guidance if you want they are really there not only to provide access to to the projects to users but also to ensure that their their um interests are are truly uh adhere to and kept at at heart U maybe with that uh Mar I don't

want to know if you want to complement that perhaps we can just jump into the recommendations you you briefly outlined and and and just tackle some of those problem statements and and how do we how do we get better at um helping users navigate this space thank you very much Franchesco sure um so if we can uh move to the next slide um so here now we want to uh propose uh basically a framework guidelines on how to operate if uh from the C perspective um and you can read uh the full description of what we propose in our paper uh but just from a a higher level point of view um basically once uh

the C they they are this entry point right for investors to come into the market and from Fiat money to come into the market now after that first step of of business decision to a certain extent um we wanted to to create an um all-encompassing architecture um a framework uh within uh where Within products and uh asset can be issued so in in our in our um oversee in our description what we what we see is that three different uh vertical access if you want first is is the mapping it's trying to assess where that specific

product or asset fit in so we need to have a clear taxonomy that needs to be uh transmitted that needs to be disclosed in a transparent manner towards users so if I am if I am investing by open today any centralized exchange or exchange or mod most of the the other uh crypto providers what I will see is basically a list of tokens Now list of tokens means almost nothing we need to understand that each token have a different category and classification and and per different classification there are inherit risk and and an opportunity there so it's

important to to First understand which bucket every single product or asset that falls into and then moving on like the the the two major uh axis that we identifies is what we can offer we can call it pre-offering and post offering right um following like the mentality of an Institutional investors that have that does pre-trade assessment and post-trade ass assessment here what we want to see is that um first of all in order to offer something you need to do your due diligence and that due diligence again this is this are guidelines okay so everyone can effectively Implement that those those guidelin in a different manner but it's

very important that we uh start to set up some rules in which we have to adere and though this process need to be clearly disclosed and transparent to um not only the investors but also to project that wants to to get listed and then we need to to clearly uh scratch the surface and start to dig into understanding who are the who are the people the most important and influential people behind that token or product how does it work exactly uh what's the level of risk from the technological point of view as much as from the financial point of view that

this specific uh product can have and and we should also need to be sure that that process is not always uh uh thumbs up sometimes it's a rejection out of this process and and that is important because it speaks about the quality and the standards that are provided um but once a project actually manage to get listed or a product manage to get listed then it's important to to give out a level of quality how much we trust this uh us Prov service provider how much we trust that product and and this one it doesn't need to necessarily

come from everything on an internal side there are many things and since we are in in a crypto space everything it's it's modular can be can be connected there are many project like certic for example with a crypto auditor or defi or any any other D.I who actually create crypto uh indicators to assess the trust and the quality of project and and that start to to generate uh a certain level of trust towards our our consumers um as well as uh any other metrics again since we are in a technological environment that we can extract uh for a for a

project that has has a very important defi presence tvl uh amount of transaction per per uh per um uh per day or yearly it's important it's a metric that speaks about the quality and the value the fair value of a project and that can only be something that must be done on a 24hour it's a continuously monitoring uh effort because we the the guidelines here stands to protect the customer not to uh push the business opportunity uh forward for uh for Prov service provider and then at the end of

all of this there is maybe a more horizontal um and very important uh effort that needs to be made which is one is always um alert and always inform the investor about uh anything that could happen and about everything that we actually list everything that we put out so for example a trust core requires an informational uh tool tip as well as um an educational uh side where where people can understand exactly how that metric how's that indicator how's that measure has been created uh

otherwise it's just random numbers that are not understood and also make people understand that there is a differentiation in between their perception of risk and their reality of the risk um a token that is perceived to be extremely there are many many example unfortunately in the past year well let's just name one uh terraluna and US was perceived stable coin well just because it's classified stable coin doesn't mean that it's stable we need to understand what the numbers stands behind stable coins what are the metrics that assure me that this is is a is really pegged one to one to the asset

that needs to be packed to so those information needs to be disclosed and needs to be easily available to an investor and then he will or she make the own choice in in what to do in in where to invest that are we we believe those are the bare minimum and a very high level framework that every cast should Implement uh in their own let's say source their own in their own way but at least uh to prevent uh more uh cases as uh the previous uh unfortunate one thank you very much and we welcoming any questions you can have thanks Marco and Francisco for this wonderful piece

of work when it comes to risk management and and I fully agree or everybody working in this industry that it is difficult to nav Navigate in the difficult Crossroads within the blockchain industry right you need to do a lot of do your own research look into the team which backgrounds they have right but this is just let's say the the social research then there's technology or technological research right does the project make sense that specific team sets up and then we can look at regulatory projects just because the exchange is the largest in the world if it has a weak Foundation somewhere in exotic island it may be not uh exactly a project somebody maybe wants to invest

in so anyone who's uh interested in understanding more about those RIS risk factors when it comes to crypto asset service providers please take a look at the wonderful paper from those two authors you can uh freely download this on Crypt val. Swiss and there you find the research Journal as marus said question answers are open please feel free to drop the questions of course in relation to the topics in to the chat and I'd like then to move on to our last author Duo which is Henry and Nicholas with their paper more from yeah technological point of view um and risk

adjusted returns in automated Market meter and the liquidity obviously when you deposit any crypto assets and some sort of liquidity provider or amm so to say such as Unis swap it comes with certain risk and Henry will now shed light on how what are those risk and how to mitigate those risks Henry looking forward to hear more from you lovely thank you very much tilma and uh thanks for having me on as well hi my name's Henry co-founded for 512m the investment advisor for the world of defi we're specializing currently in the world of stable coin returns uh till my next slide I guess yeah there we go so

in our paper uh we intended to set out and find uh given the increasing complexity in the world of decentralized exchanges moving from consum product to concentrated liquidity whether we could find any Fair methods by which we could see uh whether returns in the space were justifiable compared to other asset classes and whether there was any means by which to address the risks in these markets however when we went into our basic findings we found that my the logic in this market often follows what I see as my favorite joke in the world of defi is that there's plenty of D and

not really much fi when it comes to defi the financial knowledge that comes around and is applied in this market is usually wielded by people who've gone through Wikipedia rather than had operational Financial roles so the mathematical solutions that people have been proposing so far and historically in the world of decentralized Finance such as the those in uh concentrated product uh con product automated market makers have been purely theoretical in design and difficult to execute in reality so our basic finds when we went through um and were looking for situations and solutions for risk in the world of defi we really didn't find a huge amount um and of course when studying uh

concentrated liquidity while we see it as a massively beneficial change in terms of liquidity and the efficiency of these systems when it comes to Capital efficiency and execution uh whether that be slippage or required assets and management to maintain effective exchanges there are beneficial uh parts to the increased fees as an example you generate increased fees from the world of con concentrated liquidity automated market makers u based on a study from frit back in 2021 however um when we're looking at uh concentrated liquidity or automated market makers a phrase I will continuously repeat over and over again and is a terrible tongue twister they have a severe uh draw down in terms of

uh the impermanent loss that you take by creating virtual reserves based on Far lower allocated Capital as LPS the losses and the position ranges can lead to massive impermanent loss for allocators as LPS now when we are looking into solutions to cover the risk in these models we found a few proposed systems uh that work for constant product automated market makers such as theoretically proposed weighted variant swaps which were very interesting to look at but you need a math degree to break them down and their operations in reality are difficult to execute or long option strugles which are possible but the technical complexity or the

knowledge required to execute these effectively rendered this part of defi out of the hands anyone in the world of retail now outside of that these theoretical Solutions we found purely based in very complex and quite ugly mathematics which we'll show you later on are often in real practice entirely uh mute when you try to apply them to actual Market strategies often those Solutions uh in a fair market pricing would Eclipse any fees that you generate making them unprofitable to even Implement uh next SL so the idea that we took instead when we found that and we uh were looking

into the market and couldn't find real applications where risk could be mitigated specifically Financial Risk rather than smart contract risk or other Associated risk to counterparties would simply be to identify a fair comparison for the pools themselves because as many of you see in the world of defi if you go on any platform or protocol whatsoever that can offer you the yields in uh concentrate liquidity uh systems they simply State quite frequently purely just the tvl the average trading volumes in the last 24 hours and the apy that are generated from the pool themselves in terms of fees now these figures are often highly misleading to those in the world of

retail who might not be armed with either institutional grade analytics behind or a degree in quantitative mathematics to work out what their potential risk is in this market and so our idea instead was to come at this from the angle of Finance rather than decentralized Finance which is in a market where there is risk which is difficult to escape and outside of theoretical applications cannot be avoided is there a fair way in which you could make better decisions in a risk adjusted basis and compare uh pools and allocations in concentrated liquidity to get an assessment as to whether it's worth it to be an LP so for this we took the approach of sharp as an example 1996

sharp comes out wonderful paper which is used and most people who have experienc in the world of traditional finance will know is the most common reporting figure for the risk adjusted returns of portfolios and often used in the world of fund management now foreign equivalence for that to be built in the world of defi which would allow consumers to be able to compare pools for their risk adjusted returns we have to f figure it out for ourselves with the disgustingly ugly maths of concentrated liquidity market makers now for that we have to look into not only the estimated fees from pools uh and how the price ranges affect those estimated fees that could be generated but also

then the expected performance of the underlying assets and fair quotes for the uh volatility of these assets including the rebalancing effects of the assets in a concentrated liquidity automated Market maker now for our estimate of fees we based our work there on a few papers that have come out world of uh the eth and the University of Zurich blockchain center for the fair estimation of fees where as you tighten your price ranges you would acrew a larger portion of the effective feasa to be distributed amongst all providers of liquidity as of course by Fair estimate your liquidity be utilized more often to execute those trades and

would be the recipient of those fees so our fee estimator we constructed a fair fee estimator based on other research work and then of course to look into the value of these portfolios uh we looked at a portfolio position of uh ethereum versus US dollar usdc uh based on Unis Swap and from there we generated our own forecasting system so as you can tell this is a rather ugly piece of mathematics and and for calculating sharp in this way there's no pure calculation of volatility for allocations in V3 Unis swap math because of course it also has an element of Game

Theory within that which is for the rebalancing effect of arbitres and also external price oracles are affected so instead we simply used um the implied volatility that comes out of options markets since from the previous slide you can see that the payout structures to allocations as a liquidity provider in concentrated liquidity often uh are very similar in their payout structure to short putut positions on the relative instrument so for us instead here after some very ugly mathematics and a lot of time on a whiteboard we came back into generating the fudge Alo ratio which is from myself and my co-founder Nick and actually tell do you mind skipping back to the last one

quickly so for this one it was just to give a very simple overview for participants in the world of def5 to compare pools dependent on the assets underlying to give a simple figure which can show them whether it is a better pool or not which we think is massively lacking in the world of defi that of course as the previous presenters covered quite well often there is a lack of information and understanding which is a huge gap for these participants and of course for fair comparables we often lack those so for this as well it also gives you a benefit if you have a targeted ratio that you were looking for or or a relative taste or risk tolerance in terms of risk adjustment returns you can also back calculate um from this the

size the position range that you'd like to Target also now of course this does come with some drawbacks of course uh working over a very short period in our study that we found of course more details can be found in the paper uh and of course the difficulty of the high kosis of returns in the crypto asset market and then of course uh the issue of the game theory here which would be that in a market of end participants where I can generate optimal returns with a certain price barrier why would someone with the same price uh with the same risk tolerance not come in and set a price tolerance which is one tick shorter than mine to generate higher fees than me and crowd out my trade which is a difficult one to cover mathematically next

slide back one there we are so um during the forecasting period so we did this on October 17th when we were running through this simple estimator for an equivalent sharp ratio for the allocations in concentrate liquidity when we were using an estimator for implied volatility taken from derit option quotes uh short putut for eth uh instruments over the forecasting period with similar duration we ended up generating figures which were pretty poor in line with a lot of um other Empirical research particularly from heimbach who has some incredible research papers in the world of defi uh

for a relative risk adjusted return 0.237 six for those who are vested in the world of traditional Finance if your fund manager has a sharp ratio of 0.237 six they won't be keeping their job for too long that obviously would not be a perfect score of course usually the best rule of thumb is above one is good below one is okay below 0.5 is certainly not great now when we optimize that for a certain set barrier price as we see with the first graph for a high price of 3,000 assuming a symmetrical allocation of liquidity we had maximum figures that were in uh in terms of duration by days at approximately 155 days accounting for

the chunks that occur there in the graph based on the uh non continuous distri ution of options expiry dates so when we uh opt for a Perpetual options market and go for a continuous volatility surface we're looking at 150 days was approximately where we were finding an optimal timing for the position sizing that we had to maximize the ratio when we then set with that constraint and reoptimize then for the price high limit which would then by our symmetrical assumptions set our low prices we found that tighter price ranges around the spot price again for Price relative at this time we're talking about $1,602 ethereum and we found a price

range of uh $230 plus and a small bit below as well there found it to be the highest but again even with complete optimization on both time and on the price ranges in play we found that at the best case scenario we were getting risk adjusted return figures as stated by sharet 0.328 again not incredible and of course then since that date before the position underlying it would be entirely out of position and you would have experienced rather severe impermanent loss with your position being entirely denominated at that point in usdc and being able to participate very little in the recent

upside in uh ethereum prices obviously not today if anyone's been watching the charts now when we're looking here we just find that even in an optimized scenario even with perfect information currently the returns adjusted for risk in concentrated liquidity are simply relatively poor even with optimized strategies we found this to be a relatively useful estimate that continues to need some further Improvement and of course we're testing this in certain pools as well to adjust for the fees including across concentrated liquidity automated market makers on layer twos and salana as well to reduce the noise effect of the performance of the allocations by fees

also and last one and of course then while concentrated liquidity is a great development for the world of defi in terms of the efficiency of exchanges the slippage that persons can take while they're executing trades in the world of defi we find that both uh in a conceptual style and in a investment style they have something severely lacking conceptually the world of defi to democratize finance and allow access to the tools of Finance to everyone at the point of VI we feel that this move towards concentrated liquidity is an massive added complexity which currently retail has no ability to effectively

price in terms of risk and conceptually it's becoming massively more complex and them to be able to participate we find this is becoming just purely a another place for institutions to play uh especially when you see that strategies are far more performance when people are changing infra ween inaday most larger decentralized market makers who are playing as LPS in this space uh outside of that we're looking to continuously improve this metric and hope that uh defi in general will Embrace more standards that allow for fair comparisons of risk and reward just in terms of investor disclosures because of course due to the nature of our industry we're dealing heavily with the world of

retail and we think right now it's being underserved by these uh providers that are simply providing a complete lack of information on the uh risk of these positions while highlighting very very strongly the apys in large large numbers that people can gain there's no defi protocols that are showing people where is the optimal Place given a certain risk tolerance and there's very few that are accurately or transparently discussing the risks that can be involved here but of course for further details and some look at some disgusting mathematics it's really pretty ugly stuff uh you can check the paper as well

uh but for us we'll be continuing to test this metric as a forecasting metric and releasing some further data as well in the next coming months about its accuracy as a forecasting metric anyway thank you guys for having me and of course if there's any questions here in the chat please happy to answer than thank you Henry and of course also big thanks to Parton Nicholas in in writing handing in this paper I think today we saw the different risk factors when it comes to DS how it comes to crypto as a service providers and obviously last but not least by liquidity or concentrated liquidity automated market makers I agree as a tongue twister but a term we should all remember working in this industry I want to encourage everyone uh

of the from the audience the knowledge hungry people please go to the Crypt val. Swiss website download the research Journal it is for free and then you can read all the different papers of the authors also stay tuned for the call for papers 2024 the shout out will be soon be made online and last but not least thank you to the authors for participating handing in bearing in with me until we organized today research finding I think it's valuable work we contribute and and will impact on the industry uh that being said get your ticket for the crypto Valley Association

conference in 67 June uh this year just about a month and I hope to see everybody soon again thanks and speak to you soon