How the Harbor Protocol Assesses Risk Parameters — Market and Project Risks.
The Harbor Protocol is a decentralized forum where members of the Comdex network mint their Composite stablecoin, $CMST, which can be utilized across blockchains within Cosmos’s ecosystem. Turning whitelisted commodities in the community-governed protocol into $CMST debt collaterals, to mint the stablecoin, is easy.
$CMST is pegged to the US dollar and serves as debt backed up by the collateral assets. As a $CMST owner, when you put your stablecoin into the lockup vaults, you gain easy access to the interest rates as rewards.
Each type of asset within the Harbor Protocol has its own minimum collateralization ratio to ensure that all debts kept in the lockup vaulting pools are financially stable, thereby promoting liquidity.
A minimum collateralization ratio is the least value at which any collateral asset can be collateralized, meaning you cannot input your $HARBOR tokens below that value if you want to fund your collateral debt assets.
The minimum collateralization ratio is a risk factor because it brings about commodity liquidation when you surpass your borrowing limit and your ratio is either too low or zero.
Determining Risk Parameters in Harbor Protocol.
It is safe to mint your $CMST stablecoin with several collateral debt assets within the Harbor Protocol, using the decentralized application’s modules of assessment to crosscheck some of the imminent dangers in those assets.
To mint $CMST, there are assets that are used as collaterals to create a wedge for the stablecoin.
In overcollaterizing $CMST, certain assessments need to be made on the assets used as collaterals to determine their risk factors.
Are these assets worthy enough to serve as collaterals to peg $CMST? Or will they be of high risk to the peg?
To determine these risk factors or parameters, as Comdex calls it, the protocol takes a risk assessment on 2 areas.
✓ The Product or Qualitative Risks and
✓ The Market or Quantitative Risks.
Difference Between Project Risk Assessment and Market Risk Assessment.
1. The Product Risk assessment tries to find out about the project from which the collateral assets are derived, while the Market Risk assessment tries to find out the market conditions surrounding the collateral assets.
2. Market Risks associated with collateralization within the protocol are measured in quantity, to check the liquidity and volatility of the collateral assets. On the other hand, Project Risks aim at analyzing quality, not quantity, fully inspecting the internal audits of projects within the protocol, to know how accurate and trustworthy they are.
3. While Market Risks oversee the performance of the Harbor market, Project Risks check one by one each of the projects being carried out within the protocol.
Project Risks Assessment
This assessment borders on the project’s repute. The token you are supplying as collateral, what project owns it? What is the thoroughness and quality of audits performed on the project?
When was the project launched? What is the integrity of its team members? Are they doxxed? All these assessments make a base as to whether the token can be accepted as collateral or not, or if it should be given a high-risk value or not.
So, basically, Qualitative or Project Risk is a risk assessment of collateral in the following aspects of the Project:
✓ Thoroughness & quality of audits.
✓ Quality of smart contracts.
✓ Reputation & integrity of the team.
Project risks examine how far the progress projects have made, as the incidents that have occurred since each of the projects kicked off, the popularity of such projects, team membership integrity, the smart contracts involved, rigidity and effectiveness, the validity of the project whitepapers, amongst other important factors.
Market Risks Assessment
Determining the market risk parameters of the collateral market involves assessing every factor of the market that makes it less or more of a risk to be collateral for $CMST.
What are these factors?
✓ Maximum Intraday Drawdown: What is the maximum change in the price of the asset as experienced between high to low on a trading day over the last 365 days? This will determine if the asset is a risky one to use as collateral or not.
✓ Volatility: How stable is the asset on a trading day? What is the standard deviation of the logarithmic daily returns over the previous 90 days? This determines the stability of an asset in highs and lows.
✓ 24-Hour Volume: What is the average 24-hour volume over the previous 90 days? This shows how many people believe and actively engage in the token. The lesser the number of traders on an asset, the riskier the asset.
✓ Worst 7-day Volume: What is the minimum 7-day average 24-hour volume over the previous 90 days? Also shows the number of traders actively engaging on the asset.
If all the above boxes are rated to a certain level of risk that is within management, the protocol can take the asset.
Scoring Methodologies
The Harbor Protocol ranks the values of assets used as collateral in descending order, from the highest to the lowest values, as a scoring methodology. The ranks are from A to D.
When calculating the risks of collateral assets, Rank A situates the collateral’s value at 1, B at 0.7, C at 0.4, and D at 0.1.
Ranking Market Risks
Market risks have their own methodology, assigning collaterals to Ranks A to D via the following avenues.
1. Volatility
- Rank A, for collateral volatility falling 3% and under.
- Rank B, for collateral volatility ranging from 3%–7.5%.
- Rank C, for collateral volatility ranging between 7.5% and 10 per cent.
- Rank D, for collateral volatility, rising 10% and above.
2. 24-hour Volume
- Rank A, for 1 million or more collateral commodities trading volumes per day.
- Rank B, for trading volumes ranging from 500,000 to one million per day.
- Rank C, for daily volumes that range between 500K to 100K.
- Rank D, for the lowest trading volumes falling between 100K and zero.
3. Worst Daily Outcome
- Rank A, for drawdowns falling below 0% per 24 hours.
- Rank B, for the collateral asset drawdowns ranging between -10% and -30% per 24 hours.
- Rank C, for the collateral asset drawdowns ranging between -30% and -50% per 24 hours.
- Rank D, for drawdowns falling below -50% per 24 hours.
4. Worst Weekly Volume
- Rank A, for collateral assets having a trading volume of more than a million per seven days.
- Rank B, for a weekly trading volume ranging from 500,000 to one million.
- Rank C, for seven-day trading volumes that range from 100K to 500,000.
- Rank D, for trading volumes that have fallen below 100,000 within the past seven days.
Ranking Project Risks
All project risks within the Harbor Protocol are ranked from A (the highest) to D (the lowest) in categories such as:
- Timelines from the dates the projects began to the present
- How accurate the audits are,
- How trustworthy all the members of the project teams are,
- Project collateral assets in weekly and daily volumes.
The rankings differ from one project to another. Moreover, when the ranks have finished being categorized, the project teams measure what is known as the final numeric risk score, which would then be the average of each category’s risk score.
Conclusion
The purpose of measuring risks is simple. It is done to prevent under-collateralization and to prevent the liquidation of assets, because the lower trading volumes of collateral assets dip, the higher the risk of cancellation, thereby liquidating collaterals and sending them off to debt auctions, resulting in losses for $CMST minters.
Also, the total risk score is used to measure the total collateralization ratio by dividing the risk score by minimum collateralization ratios, in a bid to keep liquidation far away from the lockup vault pool borders.
About Comdex
Comdex is a decentralized network, featuring various plug-and-play customizable core modules for delivering leading dApps within the Cosmos ecosystem.
The network serves as the infrastructure layer of this ecosystem, using its inter-blockchain system to allow the building of interoperable solutions. Comdex likewise provides users with these solutions, and lots of unique features you would surely like to utilize.
For more insights, follow the Comdex network via the following links:
