Risk Management Framework

The current strategy encompasses understanding and deciding on two things (mainly):

• Protocol exposure

• Crypto Assets

Crypto Asset Selection

First we mainly focus on the asset selection. Deciding on the strategy and choosing the exact Pendle Token (PT) assets play a vital role in the success of the strategy. Since PT is based on an underlying crypto asset, it is necessary to understand the dynamics of the underlying asset along with the current market analysis of the PT token. Here we lay down the points for the choice. There are two aspects while deciding the PT tokens, namely a quantitative and a qualitative analysis.

Qualitative Analysis

In this part, we deep dive into studying the qualitative aspect of the underlying tokens as well as the PT tokens. Below are the points

• Underlying token is listed by a reputable firm (Aging : 6+ Months; TVL : $50M+)

• Token has been audited by a reputable audit organization (Preferable 2+ audits)

• Token is listed in protocols and those listing is managed by good risk managers (like Gauntlet, Euler, Aave).

• If the token is yield-bearing, the underlying protocol should have a minimum of $40M+ without recursive looping. Also, look at the reserve pool (reserve pool > 0.5*TVL).

Quantitative Analysis

Here we list down the quantitative analysis that we do for the underlying and PT assets.

• Underlying Token should have a TVL of $20M+ and a DeX liquidity of $10M+

• PT asset markets in protocols (Euler, Equilibria) should have a current liquidity of preferably $200K+ (assuming currently we are managing $1M). This liquidity numbers will change as our TVL increases.

• Historical analysis of the underlying assets. 95th percentile of volatility should be < 1%.

• Probability of (depegs > 0.8%) for underlying assets should be <0.1

• PT assets will be selected by looking at three attributes:

  1. Current price of PT asset

  2. APR spread of the PT assets in Euler market (while deciding on Euler pools)

  3. APR value of PT assets in Equilibria market/LP Pools (while deciding on LP Pools)

• There should be an active trigger mechanism which will alert any price drop of underlying assets of > 0.5% at any moment.

Protocol Exposure

Another important part of strategy curation is deciding on the protocol through which our strategy will gain exposure. For a healthy and less risky strategy, it is crucial to understand the underlying dynamics and credibility of the protocols. In this section, we outline the key points that we consider when selecting a protocol and implementing a strategy involving it. Here, there are two aspects to consider, namely the qualitative and quantitative analysis of the protocol.

Qualitative Analysis

In this section, we delve into the qualitative aspects of the protocols in depth. Below are the points

• Underlying protocol is in the DeFi space for a significant duration of time, and has been audited by a reputable audit organization (Aging: 6+ Months; Preferably 2+ audits)

• In the case of yield-bearing protocols, regular attestations (at least once a week) or transparent debank links.

• No/minimal presence of recursive looping in case of yield-bearing protocols.

• If a yield-bearing protocol, the underlying protocol should have a minimum of $20M+ without recursive looping. Also, look at the reserve pool (reserve pool > 0.5*TVL).

• For a yield-bearing protocol, exposure to any risky protocol that has seen any sort of insolvency scenario in the last 4 months should be avoided.

Quantitative Analysis

Here, we present the quantitative analysis performed for the underlying and PT assets.

• The protocol should have a TVL of $ 50M or more for the typical case, and for yield-bearing TVLs of $ 20M or more (excluding recursive looping).

• If the protocol has an underlying token, the 95th percentile of the volatility of the token in the last 4 months should be <1%.

• If a yield-bearing protocol has a yield-bearing coin in the market, then the presence of a $500K+ market cap in the Dex.