Alessandro Buser, Dialectic: Winning over LPs: Dealbreakers & Solutions for Stablecoin Protocols

and he will be speaking about winning over LPS deal breakers and solutions for stable coin [Applause] protocols cool yeah hi everyone uh I'm alesandro um with dialectic uh I'll give a brief talk right now about risk management and defi so for context we run uh these broad exposure defi yielding funds and we yield on uh stable coins on Ethan on bitcoin and so we do like large scale broad exposure uh exposure to to Def yields and this year alone we deployed over 400 individual positions in in defi across around 80 protocols on on 14 chains and what I kind of want to walk everyone through is how we approach risk management to be a able to deploy capital in a large scale into many different protocols moving assets from pool to pool and how we manage the risk to to be able to do this sustainably and the basically I will go through the different risk categories that that we have and that we monitor um we look at kind of like six broad categories of risk so we look at chain risk so all the risks associated with the underlying blockchain infrastructure and the chain that the liquidity pools are R we look at Bridge risks so anything that's related to the bridging infrastructure that we may have exposure to if we are lping into pools that have bridged assets then we have exposure to the underlying bridge and then what the focus will be for for this talk is smart contract risk economic risk governance and yield risk so smart contract is anything that has to do with exploits so whenever we deploy Capital into some protocol we take exposure to some set of smart contracts and we need to understand what the risk is on the smart contracts that that we have exposure to um also all of these protocols Implement some um economic mechanisms so these could be landing markets amm yield trading uh all of them have some underlying economic mechanism that's implemented by the smart contracts and these also need to be sound so like a landing Market needs to have good risk management around collateral and liquidation risk and all of these things and then we also look at governance of course so this is mainly about upgradeability because whenever we take exposure to a protocol and to the smart contracts of the protocol we look at a snapshot of how the protocol is set up but if it is upgradeable the risk profile may change from one day to the other if the smart contracts change if there is an upgrade to the implementation and so on and lastly we as a fund we need to also look at the return side so thing that we also need to consider is like when we deposit liquidity into a liquidity pool and we're earning some Rewards or some incentives what's the liquidity profile of those how can we Harvest them and and so on so um the way that we look at risk on on like a fundamental basis is that we have some tooling to break down dependency trees of defi protocols so we have this tool called nebula where we can put in a pool address and it automatically goes on chain and scans the contract interactions and it's able to generate a dependent graph um of the protocol so in this example you can see this is a pool on Aerodrome it's usdc and the USD from reserve and as you can see there's like a lot of dependencies on circle on Aerodrome on reserve on tedar and and a bunch of other stuff yeah and so now I'll go through each one of the risk categories to kind of just like visualize how we look at the different Spectrum so the things that we look at for smart contract risk is mainly like the age of the contract like how long the contracts have been online and how much tvl they have so that's kind of like a proxy for lindin um we look at the number and quality of audits to understand like have some professional highquality Auditors look at the contract and and did proper Audits and so the thing that we like to see most is like protocols that have Smart contracts that have been online for a very long time with a lot of tvl um and that have been audited multiple times by high quality Auditors and then as you can see like if we go up into the dent level of risk this is all the new protocols with low tvl with audits that may not be by the best companies um on the economic side we mainly care about pegs of tokens so if we have exposure to different stable coins in a liquidity pool we need to like understand how stable those pegs are what is the risk that we have in permanent loss on a token dep pegging and things like that and here the best case is like over collateralized uh stable coins that don't have oracles there's no impermanent loss risk so then the risk profile is really low but if it's like a stable coin that has like volatile uh collateral that has like oracles that are based on market price and that there is impermanent loss risk um then of course those end up in a in a higher risk category and there's always also some deal breakers here so things that we like totally don't deploy into even that's like the risk category above Dent risk which is just like not allowed to put Capital into that's anything that is like under collateralized endogenously collateralized so like Terra Luna for example um was like not uh part of the of the risk framework at all also like any assets that have high and permanent loss risk any stable coins that are very volatile um is is things that that we just can't deploy into from the from the investment Mandate of the funds um on the governance side we mainly afraid of malicious smart contract updates as so most of you probably saw the radiant attack and how that got executed and like smart contracts being upgradeable without the time lock is is very dangerous so this also part of our due diligence where we need to understand what parts of the protocols can be updated how is the updating process is there a time lock what's the multisig what's the process to to change the underlying exposures and here again like best case is fully immutable or like upgradable with but with a very long time lock um because then we as like LPS we can do a risk assessment on the pending changes we can see what's going to change and then in case it's something that we don't like we can withdraw the liquidity before the changes take effect um and then things that are like fully upgradable if it's only like a multisig with three out of five and there's no time lock and then of course is a lot more dangerous because we're not just trusting that the team is honest and won't rug the pool but then it's also question about what is the op SEC of the three signers on the multisig um and if they get compromised and someone could mously update and lastly in terms of like the yield realization so we don't like points um because it's not actual yield until they become tokens so that's something that from a perspective of the risk of realizing the returns is very low and so yeah this is the different categories ideal um ideal yield is paid in kind so anything anything that's real time incentives that are liquid that we can sell that's perfect anything that's like future yield is a lot more difficult for us to manage and we usually need to factor in some discount on on the yield uh that was my talk um most of my team and myself will be around so if you have any questions about uh risk management feel