Removing the Human Factor from DeFi Risk Management

Transcript

yeah okay good afternoon everyone so this talk is about risk management and risk management as you know many meanings and interpretations all over blockchain and crypto here I will focus mostly about economic risk management of lending markets however the vision hopefully will eventually scale also for more General risk management is so in landing markets and stablecoin risk management is mostly about giving some credit or loan to other people and hope that eventually they will actually pay it back and won't direct you

and in traditional Market you have rating agencies but already in traditional Market they are notoriously political some alleged that they you know gave rise to the 2008 financial crisis because eventually you know they're rating loans writing countries there are a lot of political issues who is friend of whom the power structure between American economy other economies Etc so of course then came crypto you know a big part of it out of the 2008 financial crisis crisis

but yeah as you know you know risk management in crypto is even more notorious these days uh the 2022 bear Market we saw big entities getting wrecked becoming insolvent uh funds you know like if you take three arrows FTX you know it was all about humans coming and you know making some decision to post liquidations because you know they believed that eventually they will pay the money back maybe they didn't had any choice but eventually all of that end up in a huge insolvency events and you can argue okay so crypto you

know it's kind of the wild west but you know in tradeify you have regulated markets maybe things are better so this is just an example you know from the last year we have the London Metal Exchange you know fully regulated fully Boomers exchange so yeah they also decided you know to post the trade as a result some of the big whales they didn't got liquidated and you know we can only speculate why they decided to took this step okay so the traditional Finance risk management you know is also also in centralized crypto but of course this would have never happened in D5 right

because D5 is fully transparent we all know what is going on so yeah it's really transparent but but still you know in most of the protocols right now it it is those who are taking decisions those are allegedly more transparent but still very much political taking a lot of human factors into account and this is a recent event around two months ago or so usdc got depicted you know it was a very crazy weekend all over different Market and yeah and then grandland who are managing the risk for Ave came up with a proposal which is by the way completely

reasonable proposal but you know like a proposal that eventually has a political decision making nevertheless so to pose all the Liquidation in a certain Market and yeah it could have you know risked other collaterals could have resulted in insolvency but you know like from their point of view this is the right decision to take which by the way might as you know very well be the right decision you know we know all these things only in retrospect but of course you know you can argue Gauntlet is non-political but of course the Dow decision eventually that have to accept is the this decision is very political has you know multiple

interests and maybe they have their own account there maybe their assets belong to some hedge fund or big supporters of the protocol maybe the token itself you know is somehow connected to the protocol etc etc and these are the kind of things that you know as a different user you don't really want to happen you want to know to have some certainty in execution determinism in you know what will and will not happen and this kind of things kind of give rise to you know political and backdoor channels which you know eventually are unfair and make everything less predictable

so yeah so some background about myself so I'm the founder of a b protocol and we try to mitigate risk but I'm also part of the human factor and I'm a contributor to the risk Dao in the risk now we also do risk analysis as a service so right now we are very much also part of the problem not of the solution but in our B protocol had we try to automate all of it and eventually also replace Us by some kind of uni swap formula and this unit swap formula also very much connected you know what I did

previously back in kyber network we were doing a lot of on-chain Market making done by you know heavy backend algorithms only to be eventually get replaced by formulas which were on some level much less efficient much less profitable Market making algorithms but nevertheless had much better product Market fit to defy in the defy etos so the goal that we you know aim to have is to eventually set all the risk parameters you know to keep the platform solvent and investors as a whole a coin in it you know like two details

so we need to take care of loan to value ratios liquidation thresholds and many other Landing Market parameters which are right now uh need to be heavily maintained by some Dao organization and eventually by humans and this is like a typical risk management process in defy so someone make a foreign post or you know even before on the phone post you have some risk management entity uh people don't really understand what the risk management entity does but nevertheless you know they do their best to make proposal to The Forum

then eventually if someone at the Forum cares enough you know they will try to promote it moving to an on-chain vote and eventually it will get executed so this process is not only you know very human intensive but also typically take weeks you know to execute so it's both non-transparent and also cannot really react quickly to different market conditions uh so yeah so the question is whether we as a developers can do something to save it and you know like following the defy ethos is to try to replace all these human decisions

with some kind of deterministic algorithm and almost by definition you know by doing so we will get the result that is less precise potentially might even be riskier but at the end of the day you know not doing the not doing that might be even riskier not really defy so this is kind of what we hope to achieve so if you remember all the the previous slides with the very complex chart so right now we are working on replacing it with one relatively simple formula which will take you know kind of objective

parameters into into account uh but then also could give give rise or give some input so it could give some space to some either human input or maybe some Dao input in the form of confidence level that could embed some special knowledge but would still make everything more transparent and this is something that could be maintained you know like in ranges of manses rather than days or hours and and the amazing piece for that so this was an example to one formula that we plan to launch next week but of course it's ongoing research you

know to find and make these formulas more standard also to make them open source because right now all the risk vendors you know the kind of proprietary simulation systems because eventually they make money out of it so we have to make a formula with an open source smart contract in order for it to be transparent and another issue is that the relevant data is not even on chain so right now you know you have Oracle services that will tell you what the price of an asset is but not the inputs we need for a formula which are in the form of standard

deviation Dex liquidity and in the future maybe other parameters so this is whereby protocol and now also the risk now kind of collaborate where the goal of be protocol is to have some mechanism and consensus algorithm to put the relevant data on chain uh and then researchers including risk Dao will develop the open source layer on top of it that will facilitate risk analysis so yeah so this is an example we are still not live hoping to go live on testnet in few weeks so automatically setting the LTV ratio

of Landing markets this is something pretty desirable both because you know it is notoriously for being non-transparent process but also because it's really camber some process that requires you know the days and weeks of discussions and voting where most of the time you know the out the outcome is pretty trivial uh further down the line you know we can Envision a situation where this is done completely automatic without any human intervention uh just by you know getting liquidity data feed and volatility data feed that b protocol will provide

you will have a doubt that you'll have to you know so now the landing Market down will not have to approve each parameter but only a template or formula of the LTV and this will be updated in a near time near real-time manner or even real-time manner so it could react very quickly to market conditions but also be transparent uh and you know as objective as possible also further down the line you know it could also decide uh on more maybe binary decisions for example whether you want to list or you don't want to list

certain assets it will prevent uh you know those from doing from listing uh kind of stupid and Shady assets which is by the way you know like one of the uh things that actually block and you know prevent a lot of innovation in this space is it unlike setting up or forking you know your own uni swap clone when compound or other eventually the core trust is about the risk management about not doing stupid things with asset listing and risk parameters and all these things will give you both a transparency but also will make these things more of a

commodity and more of a standard operations so this will allow for more Innovation because now it will be much easier for new project projects to enter this Market uh so yeah so where's the risko aquel and the formulas around it you know we can kind of bring Landing markets really back to d5s so it was because right now Landing markets are and also stable coins so they are very much resembled on chain Finance ethos but not only defy because eventually humans they'll decide a lot of the things so right so right now everything is very

politicized manual a lot of governance in a park and with the Oracle things will become more neutral even though even on potential a you know expense of efficiency but it will be neutral will be automated less governance as self-executed as you know smart contact and blockchain should be and of course transparent and decentralized so yeah so this is kind of you know joint work and and the two teams are also very much overlapped between the B protocol and the risk now and you can contact us you know on Telegram

or Twitter also go to our website be protocol or wisdau.org yeah thanks [Applause]