Stablecoin Risk Framework
The aim of Brahma’s Stablecoin Risk Framework is ensure the utmost efficiency when allocating base capital to generate yield. The current framework is centred around being an LP in curve liquidity pools due to the current PMUSDC vault architecture. However, it can easily be extended to include alternate base capital allocations in the future.
The framework is driven by 2 key aims:
- 1.Mitigate capital risks
- 2.Generate the best sustainable returns
Each potential stablecoin pool is first evaluated against a set of qualitative factors. These qualitative factors include the following:
- Underlying stablecoin mechanism and redeemability
- Protocol history - hacks, team etc.
- Yield sustainability
- Demand sources/current use cases
Using a tiering approach, these qualitative factors are used to create the universe of stablecoins that are investable as base pools for the PMUSDC vault.
The investable stablecoins are then evaluated against quantitative metrics which include:
- Pool Balance
- Current balance of the curve pool
- Pool Exit Liquidity
- The amount of exit liquidity relative to the external circulating stablecoin supply
- Resilience of the peg to shocks
- Swap simulations are performed on the current stablecoin pool to determine the amount required to depeg the stablecoin by a certain amount
- The depeg volumes are evaluated against the external circulating stablecoin supply
- Entry and Exit Slippage
- The cost of round-tripping assets through the pool
The quantitative factors are used to determine the overall “health” of the stablecoin pool.
After evaluating the quantitative metrics of each investable stablecoin pool a final rating is allocated together with the currently available yield. These ratings then drive the final allocation of capital to the pools. Capital is allocated to multiple pools in order to diversify underlying stablecoin exposure. However, due to the current compression of Defi yields most pools offer very similar returns and so diversification for the sake of diversification is avoided. Instead, the focus is on the diversification of stablecoin types e.g. if the best yield and risk rating is an algo-stable then look to diversify with the best rated debt-based stablecoin.
Last modified 8mo ago