Risk Scoring Matrix
Detailing the protocol's internal procedure for evaluating and monitoring yield farming strategies.
Last updated
Detailing the protocol's internal procedure for evaluating and monitoring yield farming strategies.
Last updated
Clip Finance has defined the “risk appetite” as the total level of exposure to risks associated with different yield farming strategies we’re deploying to earn a yield for our users.
Clip Finance has taken into account the level of risk that the protocol is prepared to assume and chooses its yield farming strategies accordingly. As part of our governance decentralization efforts, we plan to delegate the deployment of strategies, including the risk assessment, to a strategy deployment council which includes the most professional smart contract developers and strategists.
The risk scoring procedure is developed to detect and monitor deployed strategies in order to keep our users out of harm’s way.
For the purpose of identification, assessment and analysis of risks, Clip Finance has prepared the following risk assessment, and in doing so takes into account at least the following risk categories:
risks relating to yield farms and other connected services (bridges, swaps, etc)
risks relating to stablecoins;
liquidity risk and impermanent loss risk
As a result of the risk assessment we identify the risk levels as follows:
Low Risk
Medium Risk
High Risk
Reject Risk
Clip Finance does not deploy any strategies in the Reject Risk category. However, we may deploy strategies in Low, Medium, and High-risk categories.
Clip Finance has established the following rules of procedure that will allow for the effective mitigation and management of risks relating to yield farming strategies:
a procedure for the application of due diligence measures of the specific yield farming strategy;
Clip Finance has designed a risk matrix model for the identification and management of risks relating to yield farming strategies and related risk categories (as described in this document);
Clip Finance has documented the process of approving or rejecting the deployment of new yield farming strategies, as well as monitoring the existing yield farming strategies;
Before deploying new yield farming strategies, Clip Finance will create a risk score for the particular strategy. If the strategy is not in the Reject Risk category, the core contributors will vote on whether to deploy the strategy, which includes the deployment timeline and stress testing results. In the future, the voting process will be carried out by the specialized council.
Factors that have been considered in order to evaluate the risk of a strategy:
External protocols: risks relating to yield farms and other connected services (bridges, swaps, etc).
the risk relating to stablecoins;
liquidity and impermanent loss risk
The risk factors have been subjectively weighted in order to provide a score for each risk:
External protocols
100%
70%
Stablecoins
100%
15%
Liquidity and impermanent loss
100%
15%
External Protocols
We’re always looking for the best risk and reward relationships. Whenever possible, Clip Finance will prefer low-risk external protocols as counterparties. Even so, third-party AMMs, bridges, yield farms, and other DeFI protocols which Clip Finance protocol interacts with, pose the highest risk to our service. We can’t always ensure safety and foresee potential risks and adverse events that may occur, and must rely on the reputation and public information of these protocols.
Stablecoin Risk
Stablecoins hold numerous risks depending on the type of stablecoin being used. These risks include, but are not limited to:
Regulatory risk (if the regulators ban the usage of stablecoins to the extent they can);
De-pegging risk (if the stablecoin de-pegs from the pegged underlying asset like the US dollar);
Technology and business risk of the issuer;
Algorithm risk (algorithmic stablecoin algorithm fails under the market conditions).
While we don’t assign a lot of weight to stablecoin risk category, a realisation of the risk may cause harm to our users. We will mitigate the stablecoin risk by using collateralized stablecoins and hence believe the small overall weight to the total risk score is justified.
Liquidity and Impermanent Loss
There may be, even if momentarily, insufficient liquidity of any particular token on the external protocol Clip Finance uses to generate yield. This may lead to delays in withdrawals. Clip Finance auto compounds yield on a daily basis (or in smaller time intervals depending on the specific strategy contract), which means we shall detect any liquidity issues quickly.
Clip Finance positions may experience an impermanent loss with extreme price movements. The protocol will rebalance (auto compound) Clip Finance positions with small time intervals, but even so, there could be short term value decreases in positions held in external protocols.
When we’re evaluating strategies we will take the following factors into account:
longevity of the external protocol;
whether the external protocol has had any issues in the past and how these issues were handled;
the team and community behind the external protocol;
administrative permissions (i.e. how protocol wallets are controlled and by how many people);
audits and bug bounties of the external protocol; our internal audit of the code;
tokenomics of the external protocol;
liquidity on the external protocol
The levels of risk are as follows:
1-35%: Low Risk
35%-55%: Medium Risk
55% - 75%: High Risk
75% -100%: Reject
Let’s use the farming yield on Aave protocol as an example. Stablecoin risk contributes 15% (for the sake of simplicity for this example). IL and liquidity risk, in this case, is 3% in the overall risk score because we’re assigning only 20% of the risk to it when perceived separately (in reality this would be even less due to Aave’s deep liquidity). As Aave is a well-established protocol, we’d assign a 10% risk to it separately, meaning it would contribute 7% to the total score. The total risk score of this simplified example would be 25%, i.e. it would qualify as a low-risk strategy.
Aave strategy example risk score:
External protocols
10%
7%
Stablecoins
100%
15%
Liquidity and impermanent loss
20%
3%
After the initial risk scoring of each specific strategy, Clip Finance must monitor the deployed strategies and the potential changes to the risk profile of these strategies. In the table below, we're listing our current hard rules for the deployed strategies.
This is a work in progress, and we will be updating the table and how we must react if any of the described events occur.
Exploit of pool
Reallocate to other strategies
At least 60% of Clip's TVL in low risk strategies
Reallocate to other strategies if the rule is broken
Up to 30% of Clip's TVL in medium risk strategies
Reallocate to other strategies if the rule is broken
Up to 10% of Clip's TVL in high risk strategies
Reallocate to other strategies if the rule is broken
Up to 20% of Clip's TVL can be deployed in one strategy (one external protocol)
Reallocate to other strategies if the rule is broken
Clip's funds can count for up to 10% of the strategy protocol total TVL
Exit strategy to idle balance / other strategies
Clip's funds can count for up to 20% of the specific pool in the strategy protocol
Exit strategy to idle balance / other strategies
2+ asset pools where the stablecoin ratio becomes imbalanced, the ratio of a larger asset to a smaller asset in the pool should be a maximum of 1.4x (i.e. 70% MIM - 30% USDT). 3+ assets: DAI/USDC/USDT if one of assets has 46%+ ratio.
Exit strategy to idle balance / other strategies
Stablecoin related risks and risk management rules:
Strategy stablecoin (BUSD, FRAX, DAI, ...) depegs $0.98
Exit strategy and swap to another base stablecoin
One base stablecoin loses value below $0.98
Swap to another base stablecoin
At least 50% of stablecoins deployed in strategies should always be in base stablecoins (USDC, USDT, BUSD)
Swap to base stablecoins if the ratio of base stablecoins falls below 50% (for example, swap from FRAX -> USDT)
As a technology product Clip Finance may be a target of a malicious hacking event. We mitigate the risk via doing continuous third-party code audits by top security firms, opening a bounty program, and directing part of the revenue to the Clip Finance insurance and recovery funds.
