A Position Safety Framework and The New Era of Position Exploits
With the era of new DeFi protocols like Visor (Active Liquidity Management), Ribbon (Options, Strike Price), and Tokemak (Liquidity Direction) focusing on discretionary strategies with managers and directors we propose an entirely complementary but different approach to audits and risk management of positions. The current framework for smart contract security, auditing / bounties (ImmuneFi, Code4rena, Certik, Quantstamp) and insurance (Nexus Mutual) - all of which Visor has engaged, is not setup to handle an environment of discretionary risk taking a manger or protocol determines.
Just as we developed the Active Management Strategy Framework used by many, we are developing a Position Safety Framework incorporating variables external to contracts which reference the entire liquidity landscape, indicating risk of both internal and external position exploits.
In the first of many to come, we are announcing a grant paid to the developers at Bella Protocol for the creation of a comprehensive Uniswap v3 simulator which is able to simulate dynamic liquidity environments needed to run Position Safety simulations.
Questions we seek to answer as we develop the ‘Position Safety Framework’:
- - What types of liquidity distributions in a Uniswap v3 pool are particularly susceptible to manipulation?
- What characteristics of LP positions are prone to suffer the most as a result of price manipulation?
- Which indicators can we design to actively and reliably monitor these situations? (eg. x amount of assets required to move price x%)
- Which monitoring and reactive processes need to be in place to mitigate the impact of such manipulation?
- What safety features are most effective in mitigating the impact from these manipulations for a managed Uniswap v3 vault? (eg. limiting deposit ratios, capping deposit sizes, using TWAP oracles)
- Can insurance be provided for unsafe positions? How should it be priced?
As always, we will continue to work towards implementing active strategies and position management in a thoughtful and careful way.
