Risk Management

Risk management is based on maintaining the CR (collateralization ratio) 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:

• eliminating the risk of Volatile Token becomes 0

• Yield Token’s Δ=0 is maintained

The 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. VT - stETH NAV to 0). The lower the CR of the system, the smaller the magnitude of the price drop required to trigger such an event, and therefore the higher the probability of experiencing one.

As a result, the protocol will decide on different CR for every collateral to manage the protocol risk, thus, the risk management models are aiming to maintain these levels.

Level 1 - Mint/Redeem Controls

In stability mode minting and redeeming rules are changed as follows:

• Yield Token minting is disabled

• Yield Token redemption fees are waived

• Volatile Token minting fees are waived

• Volatile Token redemption fees are increased

These controls are designed to ensure that user actions do not push the system CR further away from stability and that actions beneficial to the stability of the protocol are not charged any platform fee.

Level 2 - Rebalancing

If the collateralization ratio drops below a certain threshold, which varies for each collateral asset, the Rebalance Pool is activated. Note: Yield Token is the tokenized version of the Rebalance Pool, a new feature that is brought with v2. Thus, technically, there is no change in how rebalancing works in the smart contracts, however, the user experience changes. When the Rebalance Pool is activated, which varies for each pair, a certain amount backing the USD-pegged asset (aToken) is converted to the collateral asset to deleverage the protocol and ensure its safety. During Rebalancing, Yield Tokens do not receive yield and can be redeemed without fees. This measure is taken to encourage Yield Token holders to redeem their positions. When the collateralization ratio rises to a safe level, which varies for each collateral asset, the protocol converts the collateral asset back into the USD-pegged asset (aToken), and Yield Tokens begin receiving yield again. Note: aToken is a USD-pegged asset that is a non-yield-bearing version of the Yield Token.

Note: This situation only applies to "Volatility vs Yield" products, where the collateral asset is a volatile token. It does not affect "Yield vs Points" or Curated Pairs products.