# Risk Management For DeFi to be able to reach the masses, proper risk management frameworks and focus are paramount. This is at the core of Orbits' mandate when building this saving application. \ \ We perceive risk management being split into two sections: * **Strategies and allocations risk management:** These risk management frameworks are related the yield, strategies and allocation side of Orbit and focused on modelling in relation to volatility, loss, and opportunity cost. * **Protocol risk management:** These risk management frameworks are related to the protocol function itself, such a withdrawals, safeguards, audits ect... *** ## Strategies Risk Management It is critical to view our strategies risk modelling framework through multiple layers. The primary layer involves the qualitative assessment of the strategies Orbit intends to onboard. This assessment examines various dimensions including strategy specific considerations, governance, smart contract, market, operations, and oracle risks and may integrate some quantitative variables. The second layer focuses on quantitative risk metrics. This framework leverages volatility modelling and tail risk measures to inform strategy performance and determine optimal portfolio weights based on historical data, worst-case scenario modelling and risk-reward. ### **Qualitative Risk Management** Qualitative risk management is mostly focused on the selection and filtering of strategies to whitelist to the yield aggregator. The core risk management principle on Qualitative risk management is risk scoring:\ \ **Risk Scoring** Risk scores impact allocations and likelihood of adding the strategy to be whitelisted, these are regularly updated based on protocol monitoring and changes, this involves giving a score to protocols based on the following: * Smart Contract risks (Audits, Quality of audits, dependancies, regular audits, upgradeability ect) * Complexity (Leverage, dependencies, lockups or queues) * Maturity and longevity (How battle tested the strategies and code-base is) * TVL * Governance Risks (Concentration, admin key control, team transparency) * Oracle risks (test, type of oracle used) * Some protocol specific analysis (Risk engines, liquidations, redemption, liquidity ect) ### **Quantitative Risk Management** Orbit's focus on quantitative risk management is focused on modelling past behaviour and future worth-case scenarios to determine the ideal way to allocate funds in a way that maximises returns while safeguarding against risk of loss or opportunity costs. \ These frameworks work together to form a risk engine for Orbit.\ The key is finding the risk balance between risk-management and capturing upside opportunities.\ These involve:\ \ **Volatility Modelling (GARCH)** Garch uses past data for model future volatility of an asset and protocol • Tracks and predicts yield volatility across different protocols. • Helps decide when to rebalance funds based on risk-adjusted returns. • Useful for adaptive yield strategies—e.g., shifting to stable yields when volatility spikes.\ \ Knowing how volatility behaves helps avoid overexposure to highly volatile yield sources that might seem attractive but carry excessive risk.
**Worst-case Simulations (Monte Carlo)** Monte Carlo runs thousands of similations with uncertainty baked in to predict best and worst case scenarios. Monte Carlo simulations test different market scenarios (e.g., a sudden depeg event, Money-market liquidation cascade).\ These simulations help Orbit optimize yield strategies by forecasting potential returns and risks ensuring more resilient and risk-adjusted allocation decisions. \ **Value-at-risk (VaR)** VaR estimates the maximum expected loss over a given time period with a certain confidence level. It helps determine the worst-case loss Orbit could face in a set timeframe (e.g., 24 hours) due to yield fluctuations or protocol risks, allowing for smarter capital allocation and risk limits.
**Conditional-Value-at-Risk (CVaR)** CVaR goes beyond VaR by estimating the average loss in extreme worst-case scenarios.\ It ensures Orbit doesn’t just prepare for the “worst typical loss” (VaR) but also accounts for risks like sudden depegging, liquidity crunches, or black swan events, leading to more robust risk management.\ \ **TLDR:**\ \ 🔹 **GARCH** forecasts short-term yield volatility—helping avoid lending pools and strategies with unstable rates. 🔹 **Monte Carlo** simulations test different market scenarios (e.g., a sudden depeg event). 🔹 **VaR & CVaR** ensure you’re not overexposed to risky pools, even if they have high yields. 🔹 **Dynamic rebalancing** (every 4 hours) optimizes allocations based on risk-adjusted returns, avoiding pools that may become illiquid or unstable. 🔹 **Alerts & risk scoring**—helps flag protocols with rising risk levels (e.g., liquidity drying up). *** ## Protocol Risk Management Protocol risk management addresses risk components seperate from the strategy and allocation components and more related to general function. ### **Alerts and Monitoring** Alerts and monitoring apply to aggregated veneues and strategies to adjust to sudden protocol changes, exploits and governance proposals. ### **Orbit Audits and Security** Orbit puts great emphasis on smart contract security **with multiple and ongoing audits with top audit firms and bug bounties.** ### **Trustless Infrastructure** Orbit builds on top of IBC as a core bridging layer which is trustless and risk-minimised, instead of riskier centralised solutions that rely on centralised parties and wrapped assets. ### **Liquidity and Withdrawals** A few measures are implemented to ensure there is sufficent liquidity availaible for withdrawals and to ensure the model operates smoothly. ### **Liquidity Buffer** Liquidity buffer is a 2-3% adaptable allocated fund kept in stables or highly liquid strategies to ensure smooth and instant withdrawals. It increases with higher volatility periods and times of higher withdrawals. ### **Withdrawal Queues** Withdrawal queues only apply if the protocol needs time to rebalance or source liquidity from strategies after liquidity buffer being depleted. ### **Withdrawal Fee Mechanism** Withdrawal fees apply to protect against spam attacks and with a base withdrawal fee of 0.1%. \ There is a mechnism to increase fees during high withdrawal periods up to 0.3% to discourage large withdrawals as rebalancing occurs . ### **Adjusting of fees for emergency withdrawals** A mechanism within strategies operates to increase gas fees for prioritised withdrawals if needed during times of emergency withdrawals from protocols. ### **Insurance (Future)** An internal insurance or stability fund is planned for the future to help mitigate again events where counterparty exploits may happen. --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://orbit-16.gitbook.io/orbit-docs/risk-and-security/risk-management.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.