Risk
Critics might ask: “Why allow higher collateral factors when protocols like Aave have dedicated risk teams monitoring and adjusting parameters?” The answer lies in the flexibility and specialization of our approach.
- Aave’s Approach: Aave operates with static, globally-applied parameters.
- Our Approach: We create dynamic risk markets to optimize for specific conditions. What may be optimal for the entire ecosystem isn’t necessarily ideal for every individual lender or borrower. For instance, if you anticipate 1% bad debt per day but generate 2% in yield, the risk-adjusted return is justified. Our system allows a subset of lenders to opt into additional risk, segregating exposure instead of applying one-size-fits-all parameters.
Custom Risk Tolerance
While Aave’s risk parameters are global, our protocol gives lenders the ability to underwrite loans based on their chosen risk levels, meaning they bear the loss in the event of a default. The base protocol views the aggregated Twyne positions as healthy according to Aave’s standards. One of the reasons Aave struggles to onboard long-tail assets is due to cross-collateralization. Their current solution, isolated vaults, fragments liquidity. In contrast, our protocol isolates risk using multiple credit vaults while aggregating borrowing volumes through existing liquidity pools.
Step 1 is to effectively isolate risk, and Step 2 is to ensure more robust liquidations.
Liquidation by Inheritance
To minimize potential losses, our protocol introduces a unique feature where liquidators can inherit other users’ positions. This operates similarly to Liquity’s Stability Pool, but with an important distinction: liquidators earn Aave and Twyne credit delegation rates until the liquidation event occurs. This greatly reduces the cost of attracting liquidators by offering sustainable and ongoing rewards for their participation.
Additionally, our system stands out as one of the few platforms where liquidators don’t need technical expertise. They can simply opt-in and start participating in the liquidation process without requiring advanced skills or technical setups. This accessibility broadens participation and enhances the stability and resilience of the protocol.
Risk Simulations
The team has extensive experience modeling risks associated with DeFi lending, CDP stablecoins, and DEX liquidity. Our methodology is premised on creating worst-case scenarios for the protocol and evaluating its responses to them. This approach is tailored to uphold the security and stability of the Twyne protocol and the broader blockchain ecosystem. Any complex DeFi mechanic can be stressed to the point of breaking or causing wide-spread losses. If we can’t tell you when typical protocol behavior breaks, we are not serving your interests properly.
Our proprietary methodology draws on the following components that complement each other and allow to deliver holistic support:
- Agent-Based Modeling helps discover emergent patterns in the protocol by modeling distinctive behavior of different market participants
- Flexible state initialization allows us to stress-test the protocol under extreme market conditions
- Employing dynamic agents helps us observe interactions between different actors
- Adjusting market-wide conditions during the course of our simulations provides an even higher level of granularity in modeling extreme scenarios and detect any negative feedback loops within the system