Rebalancing Risk pools

Chainrisk provides an in-depth Multi chain protocol strategy for moving assets from higher coverage markets to lower coverage markets to offset risk of liquidation in case of an economic attack event.

The coverage required by a protocol as a function of time can be empirically determined as -

$$Coverage(t)= \alpha_t*(Breach\,Likelihood)_t*(Quantified\, Risk)_t$$

Where $\alpha_t$ is a factor that depends on the protocol's apetite to subscribe to a coverage. $Breach\,Likelihood_t$ and $Quantified\,Risk_t$ are outputs of the scaled monte-carlo simulations being run on Chainrisk Risk Engine.

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Now, let's consider an example for Compound Finance where,

$coverage(ARB,t) = 5M$ represents the mapping of a coverage of $5M of Compound at time ton Arbitrum Market.

$coverage(OP,t) = 8M$represents the mapping of a coverage of $8M of Compound at time t on Optimism Market.

Now let's fast-forward to t+t' time,

$coverage(ARB,t+t') = 6M$represents the mapping of a coverage of $6M of Compound at time t+t' on Arbitrum Market.

$coverage(OP,t+t') = 6M$represents the mapping of a coverage of $6M of Compound at time t+t' on Optimism Market.

At this point, Compound would have to pay a sudden high premium on the Arbitrum pool due to a +$1M Coverage Requirement.

Let's consider that the Arbitrum pool had $2M worth of stETH staked by Compound ( Premium + Initial Stake ) and that the Optimism pool had $3M worth of stETH.

Therefore, % Increase in $coverage(ARB,t)$ $= {(6-5)/5}*100$= 20%

Thus we now introduce the concept of Risk Rebalancing. So as to avoid an abrupt increase in the premium in the Arbitrum Pool, we rebalance the pools,

$$stETH_{Compound}(ARB,t+t') = 2M$$

$$stETH_{Compound}(OP,t+t') = 3M$$

After Rebalancing,

$$stETH_{Compound}(ARB,t+t'+dt') = 2M + {20/100* stETH_{Compound}(OP,t+t')} = 2.6M$$

$$stETH_{Compound}(OP,t+t'+dt') = 3M - {20/100* stETH_{Compound}(OP,t+t')} = 2.4M$$

This adds another $600K in the Arbitrum pool, thus rebalancing the sudden increase in Risk and absorbing the blow up in premium prices. This also ensures better capital efficiency for the protocol's locked in LSTs.

Note.

The above example only shows the analysis as a binary balance between two pools.

• Diversification : If a protocol has pools for more than 2 markets, then the rebalance shall occur across multiple pools so that the sudden increase in risk in one pool is absorbed across the other markets.

• Economically Secure Playground : Our governance and AVS incentivises all the fiduciaries to act rationally and honestly. Rebalancing these pools removes the chances of people withdrawing funds during a sudden increase in the coverage requirement of a given pool ( Instant surge in coverage value ( increase in risk score ) could cause significant liquidations in the Coverage Markets or cause panic amongst the stakers that a potential attack might be happening on the protocol ).

• Extra APY : Since the pool suddenly becomes riskier ( more coverage required now ), people will enjoy added APY due to added premium price. Hence, user's have an added incentive now to stake more to secure the protocol.

The version2.0 of the white-paper will have a complete mathematical proof on Risk Rebalancing.