Sector Finance: Leveling the Playing Field
Moody’s, a leading credit rating agency, was founded in 1909 by John Moody after the Panic of 1907. Initially, it focused on analyzing the wild and rapidly expanding railway industry and became a trusted source of information. Today, its credit ratings are widely adopted globally by investors, regulators, and market participants
The current landscape of Web3 investment and risk analysis bears a strong resemblance to when Moody’s was needed. Several protocols, such as Yearn Finance and Ribbon Finance, are developing structured products that generate yield for users, while data platforms like Coingecko and Defillama are providing methodologies for evaluating risks. However, a deep understanding of both risk analysis and trading is necessary to apply the appropriate risk assessments to sophisticated DeFi strategies. Even with ample knowledge, users need to gather information from dozens of data sources, cleanse the data, and assign proper importance scores to the different risk factors. The time-consuming process of searching for accurate on-chain data to conduct comprehensive risk analysis can be formidable, and this can either discourage investment or lead to investments made without a proper understanding of the associated risk levels.
At New Order, we firmly believe that transparency drives the growth of our industry and brings benefits to the community as a whole. In practice, institutional investors have a significant edge over retail users in the field of investment and risk analysis. They can assemble a team of knowledgeable researchers or utilize security assessment services, like those offered by companies like Gauntlet. On the other hand, retail users may not have access to such resources, putting them at a disadvantage. To level the playing field and provide equal opportunities for both groups, Sector Finance developed the risk analysis engine that can be applied to sophisticated DeFi strategies and risk-assessed structure products.
New Order is incubating Sector Finance to democratize access to risk assessment capabilities, ensuring that real investment opportunities and risk knowledge are distributed equally among all user groups.
What is Sector?
Sector Finance is composed of three core products, the risk engine, aggregator yield vaults, and composable yield-generating strategies. The risk level of the strategies is classified by the risk engine and is provided to users to make informed investment decisions. The performance data of strategies will be used to further enhance the accuracy and robustness of the risk engine.
Comprehensive Risk Management Suite
Transparent Risk Assessment
Every strategy is assessed by the Risk Engine and aggregated into various structured vaults. On a high level, the risk engine evaluates every strategy by calculating the Value at Risk (VaR) using data from four main categories, the de-pegging risk of the underlying assets, the health of the DeFi protocols, the aggressiveness of the investment strategies, and the liquidation risk. The risk rating is assigned to the strategies and vaults based on the VaR assessment, which then gets updated automatically any time new information becomes available.
Composable Strategies
Currently, Sector offers three types of strategies: delta-neutral, leveraged delta-neutral and lending. Each strategy’s risk/return profile is calculated according to the risk model. Though similar strategies have been seen in other applications, Sector’s stand out for their high yield that does not depend on incentivization with the protocol’s native token. Additionally, their use of EIP-5115, the standard interface for wrapped yield-bearing tokens, creates standardized wrappers for individual strategies. This allows Sector to maintain flexibility in the strategies offered and quickly develop new strategies as needed.
Diversified Vaults
Sector differentiates itself in the DeFi market by constructing diversified yield-generating vaults with a strong emphasis on risk transparency. Implementing EIP-4626 ensures the vaults’ smart contracts are standardized and composable, enabling seamless integration with other DeFi protocols and crypto assets. Furthermore, the flexible strategies are efficiently aggregated and tranched according to their risk levels. As a result, Sector found a methodic way to develop diversified investment vehicles tailored to all risk profiles.
Sector’s unique design is that its investment and risk offerings empower each other. The investment strategies and vaults are classified by the risk framework, and the results will be used to refine the risk framework, thus improving the investment vehicles.
The Risk Renaissance
The Sector founding team is well-versed in the DeFi space and has a wealth of experience in risk management and developing structured products on EVM-compatible chains. Instead of creating a static yield-generating DeFi product, the team approached the problem differently. They built Sector in a modular fashion, allowing the easy enhancement of the risk engine and quick incorporation of new strategies.
Given the increasing demand for advanced risk management solutions in the DeFi space, Sector Finance is well-positioned to take advantage of this opportunity and become a leading player in the industry. The team’s proficiency in diversifying risk and transparent yields make them an ideal fit for meeting the needs of both retail and institutional investors.
We are thrilled to continue our relationship with the Sector team and are confident they will be key players in a new era of risk transparency and yield diversification in DeFi.
With their launch coming early next week, there’s no better time to get caught up! Check out Sector’s resources below:
