Securing the Stability of Delta-hedged Synthetic Dollars

Hi everyone. Uh nice to see everyone. I'm Idos and I'm with Lamarisk. At Lamarisk, we uh manage uh analyze and mitigate risks for the top leading D5 protocols like uh a curve, Athena. Uh and today in particular, I'd like to talk about u securing the stability of a delta hedged synthetic protocol.

In this case, we'll take Athena and USD uh as a case study. Uh which means that um this this is a particular uh topic but it will be extended to uh other uh uh and can be extended to other protocols as well such as for example we've just seen resolve um and this is this is also applicable to to such a protocol. Um so one why is it even important to talk about that? Uh the thing is we've recently seen um DeFi getting more and more dependent on off-chain and onchain uh operational layers which uh which means that there's an increasing uh centralization and uh there's there's there's a single point of failure which remains uh in DeFi and so it can really uh greatly affect the not only the stability of a protocol itself but also the stability of a broader market. So um how do these operational layers look like?

We have uh uh if we take Athena for example, we have the firstly the collateral management um which uh basically means that a protocol has certain backing and then these backing assets they need they need to be managed in a dynamic way. Uh not only these assets but also the hedging positions they also need to be managed in a dynamic way. Uh you have hedging venues which is uh operations that happen on uh centralized exchanges uh which uh need to be um distributed uh in a balanced way and uh also uh talking about the onchain perspective you have redemptions. The stable coin experiences redemption. So you always need to keep a liquid uh buffer which can be uh be uh invoked on demand and serve the redemption requests.

Now how do how does the well what what let's f let's firstly talk about what are the pitfalls. Um there there are many things that can go wrong in this whole operational um architecture. Firstly, if we talk about the collateral management, there's a a kind of a problem where if you use different assets for backing your own asset, you become dependent on these assets too. So, uh this is very relevant in terms of setting the right expectations, the right liquidity and uh the right stability expectations for these underlying assets too. The next thing is you have um hedging venues.

And so in hedging venues you have uh you have the perpetual funding rates which is the the whole base layer of of of how Athena operates. And so um if you have a uh stressful market conditions, you can see uh funding rates turn negative pretty fast. That means you need to be fast to uh deallocate or close exit the uh perpetual positions and uh offload your exposure. Also uh you have centralized exchanges which which are also prone to failures, right? You can like for example we've seen um by bit incident earlier this year where we had uh a big big failure which also could have affected Athena although it was managed uh quickly and then the whole uh risk was resolved.

So all of that um kind of encompasses the need to keep some kind of a stable buffer too, not to be um exposed too much. And uh in all of that is kind of engulfed in a in an idea that these risks they should be covered by something. And so in this case what lamares does and how Athena operates is uh the protocol has a reser fund which is managed by uh by taking a quant quantitative approach where we uh simulate the different short-term and long-term drawdown scenarios to be able to uh quantify how much of an insurance or a reserve does a protocol So that the stable coin is always over collateralized and in case of problems uh that cannot be predicted sometimes can also be covered by that. So uh more broadly our role is to define rules and thresholds so that the reserve fund does not need to be invoked but uh also that means everything that we do needs to be aligned with changing market conditions. So for example if you have uh negative funding rates you need to recommend that Athena moves the stable stable coin buffer increases it.

so that uh there's less stress and less uh draw down possibilities. Now the third principle is we need to provide quantified recommendations. As I said before, there's scenarios to be simulated and uh outcomes to be uh presented and this results in um our multi-vertical um risk management strategy where one on one hand you have operational rules. uh on on other hand you have um direct coverage which helps to protect uh uh pro protect the stability and also mitigate the dependency risks. Now, um, a final a final thing that I that that that I want to mention is that all of these, uh, since since the protocol is is offchain, all of these, uh, things they they also depend on how you can, um, prove that the protocol does what it's supposed to do because all the like most of the positions, as I said, they're in centralized exchanges.

How do you prove it to the end user? How do you prove it to the DeFi user? what we do with Athena. And one thing that Athena did is they uh provided a um a possibility to uh periodically connect to their um position management layer to inspect what they're doing, whether they are over collateralized, whether they're doing everything according to the rules we set. And so we as a third-party verifier, we can cryptographically verify and attest that what Athena reports is accurate and that the stable coin is actually backed as it's supposed to be.

And we believe we in Lamores believe that this um these kinds of risks and these kinds of risk management needs are going to become even more um needed in the future as we've seen a lot of growth in in uh in stable coins over the past year mainly also driven by the RWA assets which contain almost the same uh risk assumptions as I discussed here. So thanks a lot everyone. I'm happy to bring the discussion of stage. [Applause]