as of 17/06/2023
The decentralized nature of the Hatom Lending Protocol implies risks from individual interactions with all dependent systems.
Crypto assets are at the core of the Hatom Lending App, as they enable operations and hold the assets and liabilities of the protocol. The Hatom Risk Management Team has created this documentation with a focus on assessing the risks associated with the crypto assets supported by the Hatom protocol. The risk assessment considers the selected crypto assets' market, counterparty, and smart contract risks to contribute to higher risk standards within the DeFi space.
On Hatom Lending Protocol, users can Supply and Borrow crypto assets in an over-collateralized fashion through decentralized Lending Pools. Suppliers receive an equivalent amount of their deposit in HTokens, "which is a protocol-issued token" that gathers the interest generated. Borrowers have to deposit collateral to be able to take a loan. The collateral secures the loan and plays the role of a risk mitigation tool against default. Crypto assets are at the core of Hatom's decentralized lending operations. More details on how the protocol works can be found in Hatom's Whitepaper.
The selection of the crypto assets has been realized with the following constraints:
The protocol risk of insolvency increases with each crypto asset added as collateral to the Hatom lending protocol. The assets of the Hatom Protocol are the collaterals, while the liabilities are the borrowed amounts. The crypto assets supplied and borrowed often differ, with loans mostly taken in stablecoins and collateralized by volatile tokens. This means that the protocol is strongly exposed to the failure of the supported token systems and market fluctuations.
Exposing the protocol to the centralization risk of the centralized currency accepted as collateral. The single point of failure risks of underlying crypto-assets flow into Hatom Lending Protocol.
Reducing risks via diversification benefits by having a volume from different crypto assets in our lending pools.
Significant controls are mandatory to ensure the currency implemented will add more value than risk. Crypto assets need a fantastic product and a large community to be considered. The risk assessment investigates and decides whether the crypto assets represent a reasonable risk for the protocol, calibrating the currencies parameters to reduce those risks.
See the Governance docs for the new asset listing process.
as of 17/06/2023
First, we look at smart contract security and counterparty in governance. After that, we look at market risks that can be managed via the protocol’s parameters. If these risks are too high, the protocol will disqualify the currencies.
The risk scale ranges from the Lowest risk A+ for the safest assets of the protocol (usually MultiversX) to the Highest risk D-. The assets exposed to high-risk factors can be considered for integration.
Smart contract risk focuses on the technical security of a currency based on its underlying code. If one of the supported currencies is compromised, collaterals will be affected, threatening the solvency of the protocol. Projects must have undergone audits to be considered, yet smart contract risk is significant. Bug Bounties can help, but they cannot be fully mitigated. We assess Maturity based on the number of days and the number of smart contract transactions as a representation of use, community, and development. These proxies show how battle-tested the code is. Smart contract hacks have already resulted in billions of funds lost on other networks. Accordingly, tokens with the highest smart-contract risk (i.e., D+ and below) are extremely risky collaterals.
Counterparty risk assesses qualitatively how and by whom the currency is governed. We observe different degrees of governance decentralization that may give direct control over funds (as backing, for example) or attack vectors to the governance architecture, which could expose control and funds. The counterparty risk is measured from the level of Centralization corresponding to the number of parties that control the protocol, the number of holders, and the trust in the entity, project, or processes. Currencies with a high counterparty risk below D+ cannot be integrated.
Market risks are linked to the size and offer and demand fluctuations. These risks are particularly relevant for the assets of the protocol: the collateral. If the collateral value decreases, it might reach the liquidation threshold and start getting liquidated. The markets then need to hold sufficient volume for these liquidations - sells, which tend to lower the underlying asset price through slippage affecting the value recovered.
We look at these values at one week, one month, three months, six months, and one year.
The historical data supporting the analysis is extracted from CoinGecko's API as of the 15th of January 2022 and is combined with on-chain data. The methodology to link historical data to risk factors has been formalized based on rigid criteria for each factor and rating.
The matrix below shows the figures used to quantify risks per factor. This table is based on historical data to which we have applied the above calculations.
The composability of DeFi enables to connect with the rest of the ecosystem. However, it also exposes the protocol to financial contagion. Crypto assets used in the protocol affect it at its core, which safeguards its solvency. We investigate three levels to ensure a currency holds a reasonable risk.
We look at the average 24h volume representing the availability of the currency to assess Liquidity risk:.
The Volatility risk is based on the normalized fluctuations in the currencies price and calculated as the standard deviation of the logarithmic returns:.
This metric is in line with industry standards used by .
Cryptocurrencies can be subject to sudden volatility spikes; it is not uncommon to witness 30% changes in price within a week or a month. When this is a price increase to protect our users, it might be followed by a parameter readjustment to limit the risks of new operations. Finally, we also consider the Market Capitalization representing the market size. Market risks are used for the calibration of the model’s . The volatility helps define the required level of collateralization, the . The liquidity risks are contained by liquidation incentives: the and .
(will be updated for new MMs) as of 01/30/2023
The results of the Risk Assessment Methodology are shown in this section, and an analysis has been made for each crypto asset that has been considered.
The table below shows the risk ratings per asset computed by our Risk Assessment Methodology after being applied to our historical data. This update was made on April 2022 and reflected the recent market volatility and considerable growth in use with some tokens.
USD Coin (USDC) is a digital currency backed by U.S. dollar assets. USDC is a tokenized U.S. dollar, with one USDC coin pegged 1:1 to the value of one U.S. dollar. The value of USDC is designed to remain stable, making USDC a stablecoin.
USDC Smart contract Risk: A-
USDC on the MultiversX Blockchain is called Wrapped USDC and has only been active since the 12th of November 2021, with already over 682,089 transactions.
USDC Counterparty Risk: B
USD Coin is a stablecoin pegged to the U.S. dollar on a 1:1 basis. Every unit of this cryptocurrency in circulation is backed up by $1 that is held in reserve, in a mix of cash and short-term U.S. Treasury bonds. The Centre consortium behind this asset is a trusted entity in the ecosystem and is audited monthly by Grant Thornton.
USDC Market Risk: A+
There is a high trading volume for USDC on the xExchange reaching millions daily. USDC is a stablecoin backed by real USD, leading to low volatility.
The MultiversX eGold (EGLD) Token is the native token of MultiversX Network and is used for everything from staking, governance, transactions, smart contracts, and validator rewards. The MultiversX Blockchain is a highly scalable, fast, and secure blockchain platform for distributed apps, enterprise use cases, and the new internet economy.
EGLD Smart contract Risk: A+
The EGLD token was launched on the 30th of July 2020; it has more than 39 million transactions and almost a 4 billion market cap.
EGLD Counterparty Risk: A+
EGLD is non-custodial and open source, with nearly 1,449,128 holders, presenting a low centralization risk.
EGLD Market Risk: A
The core fuel of the MultiversX Blockchain, EGLD, has a high trading volume reaching hundreds of millions daily. It is a well-known currency available on all major exchanges and has rather low volatility.
MEX is the token powering the xExchange (Maiar Dex). It is required for the governance of the decentralized exchange platform as fuel for the perpetual decision-making process that will maintain the Maiar DEX ahead of the curve in terms of innovation, operational model, listing policies, and other actions aimed at creating a sustainable value cycle for its stakeholders.
MEX Smart contract Risk: B+
Mex has been active since 19th November 2021, with over 7 million transactions.
MEX Counterparty Risk: B
MEX is the governance token of the Maiar exchange; it has already reached 50,506 holders and has a large community using its exchange daily.
MEX Market Risk: B+
The community has well received the MEX token. The price was quite stable but decreased by 50% during the bear market; it is now stable again.
The Hatom Token is at the heart of the Hatom Protocol Governance System. A percentage of the revenue of the Hatom protocol has been dedicated to a yield staking of the Hatom Token.
HTM Smart contract Risk: B-
HTM launched on 14th July 2022, with nearly 800,000 transactions.
HTM Counterparty Risk: B
The Hatom Token is the governance token of the Hatom Protocol, a 100% community-driven lending protocol. Hatom Token already has more than 68,000 holders.
HTM Market Risk: B
Hatom Token has seen an increase in its price short after being launched; it has then stayed stable. The token price has shown low volatility during the last months.
The RIDE token is the utility token of the Holoride platform; it is fundamental to its ecosystem. Digital items, upgrades, and all services of the Holoride platform will be purchasable in RIDE tokens with a discount compared to their Fiat price.
RIDE Smart contract Risk: B-
RIDE launched in November 2021 with 130 million RIDE tokens as an initial circulating supply; It has reached 561,010 transactions until now.
RIDE Counterparty Risk: B
RIDE is essential to the governance system of the Holoride platform. The number of RIDE token holders is around 40,350.
RIDE Market Risk: B-
Ride token price has seen multiple sudden variations since its launch. It has remained pretty stable during the last few months, but it may be subject to unexpected changes in price.
(will be updated for new MMs) as of 01/30/2023
Every crypto asset in the Hatom Lending Protocol has defined values related to their risk, influencing how they are Supplied and Borrowed.
Risks change following the changes in market conditions. The assets integrated into the Hatom Protocol require constant monitoring as the risk parameters must be continuously adapted to the current market state. You can find below a table that tracks the parameter changes.
Hatom aims to work 3rd parties to provide dynamic risk parameters recommendations for the Hatom Lending Protocol.
The Risk Parameters can reduce the market risks of the crypto assets available on the Lending Platform. Every single loan is protected by Collateral that can be subject to volatility. For a position to stay Collateralized, it needs sufficient margin and incentives. In case the value of the Collateral decline below a threshold, a fragment of it is sold to liquidators to repay a part of the position and to maintain the loan Collateralized.
Stablecoins are the most borrowed assets in a Lending Protocol, as users prefer to use volatile assets they are long on as Collateral. This way, the users can get liquidity without closing their position and selling their assets.
Hatom’s Risk Parameters define Collateralization and Liquidation rules and help reduce market risks. These parameters are unique for each asset to solve the specific risk identified for each asset.
The maximum amount of an asset that can be borrowed with a particular collateral is defined by the Loan to Value (LTV). The (LTV) is expressed in a percentage. For example, if LTV=80%, borrowers can borrow 0.8 EGLD worth of the available assets for every 1 EGLD worth of Collateral they supply. The LTV evolves following market conditions once a borrow has been taken.
The delta between the Loan-To-Value and the Liquidation Threshold is a safety cushion for borrowers.
A Liquidation Penalty (or liquidation incentive) is the cut in price at which a liquidator receives a user’s Collateral when a Loan has passed the Liquidation Threshold.
The formula below allows calculating the Health Factor based on the Risks Parameters:
The position is subject to liquidation if Hf<1 to conserve solvency, as described in the diagram below:
The portion of borrower-paid interest (per second) that goes to the reserve. The remainder of the borrower-paid interest goes to the MM’s suppliers.
Risk Parameters are impacted the most by market risks:
Liquidity is key for the Liquidation Process; it’s based on the volume of the markets. The Liquidation Process can be prevented through the liquidation parameters: when the liquidity is low, the incentives are high.
The Collateral assures the stability of the Lending Platform and has to cover the liabilities; it is directly and negatively affected by the volatility.
The required coverage level, or Loan-To-Value, reduces the risk of the Collateral drops below the borrowed amount. The Liquidation process is also affected as the margin for liquidators has to allow for profit.
USDC Stablecoin is the crypto asset with less volatility, followed by EGLD. They both have the highest LTV at 70% and the highest Liquidation Threshold at 75%.
UTK is the crypto asset with the lowest LTV at 50%. Its Liquidation Threshold is set at 55% to prevent our users from an unexpected price drop resulting in under-collateralization followed by Liquidation.
The market size is represented by market capitalization. It is essential to the process of Collateral Liquidation. The Collateral Liquidation Process can be prevented through the liquidation parameters: when the market cap is Low, the incentives are High.
The overall risk is a rating that defines the level of risk of each Money Market separately.