As the Rari Capital machine continues forward with the rollout of our initial governance proposals, new strategies, and additions such as Fuse or Tanks, I would like to introduce another project, Rari Safety Scores. Rari Safety Scores, or RSS, is a framework to automatically analyze, quantify, and standardize risk in DeFi.
Currently, with the first iteration, it is designed to score assets and money markets, with each being autonomously evaluated through the aggregation of public data on the asset or market. Overall, assets and markets are analyzed with specific variables using unique parameters orchestrated to account for specific areas of risk. Safer assets and markets earn higher scores while more risky or volatile counterparts score lower. Scores are represented out of 100.
As a brief overview, I will cover the most critical variables in the calculation:
- Market Cap: the most weighted variable. If assets hold a market cap of less than $1 million, they are instantly given a 0%. Otherwise, they are compared relative to the median of the top 30 asset market caps in DeFi. This is intended to counter weaker assets and scale with the growth of DeFi, as the median will rise with increased asset performance in DeFi.
- Liquidity: a score that aggregates the asset liquidity from Sushiswap and Uniswap. This is a crucial variable as assets with less liquidity are often more volatile and are more difficult to exchange, thus increasing the risk of the asset.
- Volatility: assets are gauged using variance across a 30-day price range. Assets with more price variance and deviation from the 30-day mean are more volatile, and while they may potentially see the highest jumps in price, these assets are nonetheless more risky to hold than stable assets.
- Swap Count: a strict variable that measures the number of swaps an asset has seen. If the number of swaps is below 10k, the asset automatically scores a 0% for this variable. This is designed to counter fraudulent assets or newly made assets with little interaction.
Launching further from the RSS asset scores provided, individual money markets such as lending USDC on Aave, DAI on Compound, or ETH on Cream can be easily scored. This will provide a clear metric for evaluating the risk of specific markets. The score itself is inherently useful, as it can greatly inform a DeFi user, but opens many possibilities for yield aggregating on Rari Capital and more specifically, Fuse.
While most of the money markets scoring framework is straightforward, as many standard variables are weighed across ranges to determine the relative safety, particularly utilization, which is considered to prevent bank runs, it also features a unique “Critical Variables” section. This portion is worth 30% of the total score and consists of three tested variables, minimum asset score, relative liquidity, and liquidator incentive. If any of these variables fails to pass its designated standard, the entire “Critical Variables” section is counted at 0%.
- Critical Variables: this pass/fail section is built to resist markets with weak assets (inherently volatile), assets with uneven liquidity (hazardous to exit from), and markets with insufficient liquidator incentives or too extreme collateral factors (can cause stalled liquidations if the minimum balance between liquidator incentive and collateral factor is not met).
This framework will receive repeated testing and continuous revisions to improve and optimize the system to reach maximum effectiveness. As RSS is a dynamic system, we’d love to hear your feedback. Ultimately, as we continue building at Rari Capital, RSS and its automated nature is an exciting new framework that opens a multitude of new opportunities for the Rari Capital ecosystem and hopefully, DeFi as a whole.
The Rari Capital team and I are extremely excited to showcase our recent developments, so I welcome you to join in for the ride.
-Justin Yu (Twitter: @JustinTylerYu)