Cenit Finance, DeRisking DeFi

Risk Management for a robust and interpretable DeFi ecosystem

Welcome to Cenit Finance presentation post 👋

At Cenit, we specialize in Risk Management for the Decentralized Finance Industry. Our vision is to make DeFi robust and secure against market risks through data and technology.

Crypto technologies bring a lot of benefits with them such as, transparency, accessibility, self custody, and availability. In Cenit we are true believers in that many of the barriers and pains of the traditional financial industry can be radically solved by the application of these technologies through Decentralized Finance. DeFi will allow anyone, anywhere, to access financial services with equal conditions and without the need to rely on centralized entities.

However, this radical innovation comes with a price. DeFi is still a much more volatile and risky endeavour than the matured financial markets. To face the volatility of a new market, a good risk management methodology is key to ensure adoption and viability.

At Cenit we provide this risk management to DeFi protocols through an agent-based simulation solution. This enables protocols to measure their current risks and understand how to tune their parameters in order to ensure their safety and maximize their capital efficiency.

The Importance of Risk Management

Risk Management helps answer the question, what could happen? Or, more precisely, what are the possible outcomes of an investment and how can I be prepared? Risk Management aims to identify, evaluate, and mitigate uncertainty in decisions, calibrating the risk and reward of investments.

We have seen multiple times in the financial industry what happens when risks are not measured and managed properly. From Lehman Brothers, to the European debt crisis or the 80s’ Latin American debt crisis, these crises should teach us a lesson: we should be constantly checking over-debted markets and taking action before it’s too late.

Crypto is no different in this regard. Uncontrolled leverage and under-collateralization have led to cases such as Celsius, Three Arrows Capital or BlockFi. Decentralized Finance should learn from these lessons and be prepared.

DeFi Lending Protocols & Risk Management

One of the most common applications of DeFi is lending protocols. Lending protocols are Smart Contracts where some users can deposit funds for other users to borrow, in exchange of a fee.

Most DeFi loans are overcollateralized. As in traditional finance, we need to use some assets as collateral for the scenarios where we cannot pay back our debt. Three main agents might be involved in a loan: lenders, borrowers, and liquidators.

Example of agents that interact in a DeFi Lending protocol

Example of how a DeFi Protocol works

  1. Lenders introduce the currency they are willing to lend in a Lending Pool. In exchange, they will receive a share of the profits accumulated by the pool through fees paid by the borrowers.
  2. Borrowers can borrow money from the Lending Pool in exchange for a fee. They also have to lock another asset as collateral for their loan. When a loan is overcollateralized it means that the amount borrowed is lower than the value of the collateral locked. Their ratio is called Loan To Value (LTV), and it is a key parameter for managing the risk involved in the lending process.
  3. Liquidators ensure the continued health of the lending protocol by eliminating bad debt. Crypto markets are volatile and the collateral for the loan could reach a point when it is worth less than the amount originally borrowed, so that borrowers have no incentive to return their loans. That is an underwater loan which exposes the lending pool to losses. Before we reach that scenario, liquidators are allowed to act by paying the borrower’s debt to the lending pool and claiming their collateral, which they may then sell on a third party market. The parameter that defines when a liquidator is able to act over a loan is called liquidation threshold. Liquidators are incentivized to act thanks to liquidation bonuses.

Each of the parameters mentioned affect the protocol and every agent differently

Selecting the optimal parameters to ensure the proper functioning of the protocol and incentivisation of every agent involved, even for the worst market scenarios, is a very complex task. This is where we provide a data-driven solution.

How Cenit is helping the DeFi industry

DeFi is a 60 Billion market with over 1800 financial protocols (source: Defillama) and growing. For each of them, Risk Management will be the cornerstone that will ensure their performance and long term viability.

In Cenit we stress-test DeFi protocols. Our technology is capable of simulating millions of realistic market conditions and the interaction of each agent with the protocol, driven by an incentive-based model. Thanks to this, our clients can test their protocol against every one of these possible future scenarios.

We calculate the optimal value of protocol LTVs, liquidation bonus, liquidation thresholds and any other parameters to make your protocol more competitive, robust and capital efficient.

We are a team of data-driven tech enthusiasts that aim to help in the mass adoption of the DeFi ecosystem by lowering its risk.

Reach out if you want to know more or join our team

Thanks for reading! :)


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