Risk Management Framework for DeFi Protocols

A structured approach for the monitoring, management and disclosure of risks for DeFi protocols

November 22, 2023

Download PDF

This guide offers a structured approach for the disclosure and management ofrisks for decentralized finance ՄDeFi) protocols. In the realm of blockchaintechnology, while some on-chain information is easily accessible, obtaining acomprehensive understanding of a DeFi balance sheet's evolution can beparticularly challenging for stakeholders. This is further exacerbated by thepresence of a governance layer with significant decision-making authority over theprotocol, that often has neither a clearly defined strategy nor a well-articulatedrisk appetite and risk exposures limit framework. To mitigate these shortcomings,we propose a comprehensive framework aimed at rendering the risks associatedin DeFi protocols more transparent and mitigation strategies more objective. Bydoing so, our framework equips all stakeholders with the means to comprehendthe protocol's strategy, assess risk, and actively monitor an evolving situation.

Download PDF

This guide offers a structured approach for the disclosure and management ofrisks for decentralized finance ՄDeFi) protocols. In the realm of blockchaintechnology, while some on-chain information is easily accessible, obtaining acomprehensive understanding of a DeFi balance sheet's evolution can beparticularly challenging for stakeholders. This is further exacerbated by thepresence of a governance layer with significant decision-making authority over theprotocol, that often has neither a clearly defined strategy nor a well-articulatedrisk appetite and risk exposures limit framework. To mitigate these shortcomings,we propose a comprehensive framework aimed at rendering the risks associatedin DeFi protocols more transparent and mitigation strategies more objective. Bydoing so, our framework equips all stakeholders with the means to comprehendthe protocol's strategy, assess risk, and actively monitor an evolving situation.

Other projects

Morpho

Overview of USYC

Steakhouse Thoughts
Overview of USYC Hashnote US Yield Coin
read more

Overview of BUIDL

Steakhouse Thoughts
Overview of BlackRock's foray into public blockchains with BUIDL
read more

Fonbnk: Mobile payments and stablecoins in Kenya

Steakhouse Thoughts
Fonbnk’s tokenization of airtime minutes and integration with mobile money services present an innovative model with the potential to expand financial services to underbanked populations in African markets.
read more
LidoDAO

Restaking and the price of trust

Steakhouse Thoughts
What is restaking, and how does it affect the price of trust for capital providers?
read more
MakerDAO

MakerDAO Financial Report 2023

Financial Planning & Analysis
A comprehensive look back on 2023 for MakerDAO, along with an in-depth introduction to the protocol and its future changes
read more

Benchmarks and performance attribution for DAO treasuries

Steakhouse Thoughts
Can we learn from investment performance evaluation in traditional finance to help DAOs make better decisions?
read more
Mountain Protocol

USDM (Mountain Protocol) Review

Steakhouse Thoughts
USDM (Mountain Protocol) Economic and Legal Review
read more

Operating Manual for Decentralized Stablecoins (1st. ed)

Steakhouse Thoughts
In this article, we want to learn from traditional banking to see how it might help us understand decentralized stablecoins better. We're not saying that decentralized stablecoins are just like banks – there are lots of differences, and we'll explore those in future discussions. But, banks have been a key part of the world's financial system for centuries, so we believe studying them can give us some valuable insights for running decentralized stablecoins.
read more
MakerDAO

Steakhouse Tokenized T-Bills Review 2023

Steakhouse Thoughts
This memo discusses and compares the different T-bill-like products that have emerged in DeFi since the beginning of 2023. At their core, these products offer exposure to T-bills and provide access to the risk-free yield in DeFi. We believe these products could prove to be compelling for the stablecoin market given their lower reliance on bank deposits and ability to provide a yield.
read more
MakerDAO

MakerGAAP Accounting Ledger

Financial Planning & Analysis
We take a principles-based approach to our choice of accounting standards. This means our reports will not reconcile to US GAAP or IFRS, nor should they aim to. We are focused on finding adequate representations of the underlying economic reality of an on-chain protocol, with adaptations to the choices we make for representing smart contracts.
read more
MakerDAO

Automating Asset and Liability Matching

Strategic Advisory
Steakhouse proposed a framework approach to addressing liquidity imbalances in the MakerDAO stablecoin including a dampened redemption curve and time-locked savings vaults
read more
LidoDAO

Objective-based liquidity design for stETH and directions for further research

Strategic Advisory
Steakhouse evaluated the suitability of this Lido's liquidity spending for stETH by looking at whether the DAO improve its governance by paying incentives in LDO, whether paying incentives helps sustain a closer exchange rate and whether the DAO should aim to sustain a large cushion of liquidity to protect looped staking
read more
MakerDAO

MakerDAO Financial Report 2022

Financial Planning & Analysis
Despite a challenging 2022, MakerDAO closed the year with a positive surplus and groundbreaking new developments in real-world assets.
read more