Risk Management

Risk management is based on maintaining the CR level at a level that the protocol stability can be sustained. If CR is below a certain threshold, the stability mode is activated to ensure:

1. eliminating the risk of xAVAX becomes 0

2. aUSD’s Δ=0 is maintained

Selection of the threshold at which stability mode is engaged is based on the probability of a one-day price drop so severe as to push the system CR to 100% (i.e. xAVAX NAV to 0). The lower the CR of the system, the smaller the magnitude of the AVAX price drop required to trigger such an event, and therefore the higher the probability of experiencing one. According to Coingecko data between 2020-09-22 00:00:00 UTC and 2023-12-29 00:00:00 UTC, the probability of a one-day price drop to push the system CR to 100% is 0.0% if the protocol maintains a 160% ratio CR. This means there were no days until 2024 when the daily price drop of AVAX was 37.5% or more.

As a result, the protocol will maintain a 160% ratio CR to manage the protocol risk, thus, the risk management models are aiming to maintain this level. However, in the future, as the AVAX volatility decreases, the CR can be decreased. Based on our calculations, the possibility of such a price downturn is almost not possible: https://docs.google.com/spreadsheets/d/1fKvmTz3vYAQP35cH1Pa8dSUD1NCOTEIQO5vLijqiXHI/edit#gid=526713538 However, the protocol will still take a cautionary approach and take necessary steps to ensure no risk emerges.