Rumi Protocol Risk Management
Rumi Finance Risk Management
A Comprehensive guide to how Rumi embeds Risk Management in its platform
- 1.Background and importance of risk management in DeFi
- 2.Overview of Rumi Finance's risk management approach
- 2.Strategy Design and Approval Process
- 1.Strategy proposal
- 2.Quantitative analysis
- 3.Peer review
- 4.Governance approval
- 3.Financial Operations and Risk Management
- 1.Leverage management
- 4.Rumi's Risk Engine
- 1.Data collection and processing
- 2.Risk metrics calculation
- 3.Risk scoring and assessment
- 4.Alerting framework
- 5.Real-time monitoring dashboards
- 6.Automated risk management actions
- 5.Risk Management Practices
- 1.Proprietary risk framework scoring
- 2.Investment committee and governance
- 3.Risk management operations engine
- 4.Automated kill switches
- 5.Real-time analytics dashboard
- 6.Weekly strategy reviews
- 7.Risk reporting and monitoring framework
- 8.Drift and portfolio allocation rebalances
- 9.Risk committee monthly reviews
- 10.API services for reporting financial and risk metrics
- 11.MPC wallet management and client controls
- 12.Smart contract security audits and bug bounties
- 6.Rumi's Future Developments and Enhancements in Risk Management Practices
1.1 Background and importance of risk management in DeFi
Decentralized finance (DeFi) has revolutionized the financial industry, offering a wide range of innovative solutions for lending, borrowing, trading, and investing. However, the rapid growth and complexity of the DeFi ecosystem have also introduced numerous risks that need to be carefully managed to ensure the stability and security of the platforms and their users' funds.
Risks in DeFi include smart contract vulnerabilities, market volatility, liquidity issues, and operational risks. Effective risk management is crucial to protect investors' assets, maintain trust in the DeFi ecosystem, and drive further adoption of these innovative financial services.
1.2 Overview of Rumi Finance's risk management approach
Rumi Finance recognizes the importance of robust risk management in DeFi and has implemented a comprehensive framework to address various risks associated with its platform. The protocol's risk management approach involves several layers, including strategy design and approval, financial operations, a risk engine, and a wide range of risk management practices.
The aim of Rumi's risk management framework is to provide a secure environment for users to access superior yield strategies while minimizing exposure to potential risks. This paper will discuss in detail the different components and practices that make up Rumi Finance's risk management approach, demonstrating its commitment to ensuring the safety and stability of its platform and users' investments.
- 1.Strategy design and approval
- 1.Strategy Proposal
Rumi Finance's research team constantly explores and identifies new opportunities within the DeFi ecosystem. When a promising strategy is identified, the team develops a comprehensive proposal that outlines the mechanics, potential risks, and rewards of the strategy. The proposal includes a detailed explanation of the strategy's underlying logic, the DeFi protocols and assets it interacts with, and any specific risk mitigations that need to be put in place.
- 1.Quantitative Analysis
After the proposal stage, the strategy undergoes a thorough quantitative analysis. Using historical data and advanced mathematical models, the research and development team assesses the strategy's risk-adjusted performance to ensure that it meets Rumi Finance’'s standards. The analysis includes evaluating the strategy's potential return, volatility, and correlation with other strategies within the platform.
- 1.Peer Review
The proposed strategy is then subject to a rigorous peer review process. Experts within Rumi Finance's team scrutinize the proposal and identify any potential weaknesses, improvements, or modifications that should be considered. This collaborative process helps to refine the strategy, ensuring that it is as robust and effective as possible before being submitted for governance approval.
- 1.Governance Approval
Once the strategy has undergone the necessary research, analysis, and peer review, it is presented to Rumi Finance's governance system for approval. This step ensures that the strategy aligns with the platform's overall objectives and risk appetite. Only after receiving the approval of the governance system can the strategy be deployed on the platform.
Following governance approval, the strategy is implemented and made available to users on the Rumi Finance platform. The deployment process involves integrating the strategy with the platform's existing infrastructure, including its risk engine and financial operations. This ensures that the strategy is fully integrated with Rumi Finance's risk management framework from the moment it is launched.
- 1.Financial Operations and Risk Management
- 1.Rumi Prime lending module risk management
The lending module is a critical component of Rumi's platform, enabling users to access leverage for capital efficiency and hedging purposes. To ensure the stability and security of the lending module, Rumi implements a comprehensive risk management framework that addresses the unique risks associated with lending activities, including the features discussed below:
Instant Liquidity: Rumi provides instant liquidity for single asset lenders, ensuring that users can easily withdraw their funds when needed. This feature contributes to the overall stability of the lending module by preventing sudden liquidity crunches that could negatively impact the platform.
Capacity Utilization: Rumi monitors capacity utilization closely to ensure that the lending module operates efficiently and effectively. By keeping a close eye on the utilization rates, Rumi can optimize its lending operations and maintain a healthy balance between supply and demand.
Rumi Liquidity Reserve: To further enhance the liquidity management of the lending module, Rumi maintains a liquidity reserve. This reserve serves as an additional source of liquidity, allowing the platform to free up funds when needed to maintain smooth operations and prevent potential disruptions.
Deleveraging Mechanisms: In the event that the lending module encounters stress, Rumi has implemented deleveraging mechanisms, including the use of the Rumi liquidity reserve and strategic deleveraging of investment strategies. These mechanisms help to mitigate lending risk by reducing exposure and ensuring the continued stability of the lending module.
Insurance Reserve: Rumi maintains an insurance reserve to cover potential eventualities that may arise from its lending activities. This reserve acts as a financial backstop, providing an extra layer of protection for users and helping to maintain the overall stability and security of the lending module.
- 1.Leverage Management
Leverage is an essential aspect of Rumi Finance's strategies, allowing for increased capital efficiency and hedging opportunities. However, it also introduces additional risk. To manage this risk, the protocol closely monitors and controls the deployment of capital and maintains liquidation thresholds to prevent forced liquidations. This involves regularly assessing the health of borrowed positions, adjusting collateral ratios, and unwinding leveraged positions if necessary to maintain a safe leverage level.
- 1.Rebalancing and Drift Management
Strategies within Rumi Finance often require regular rebalancing to ensure optimal performance and maintain the desired risk profile. Rumi employs both off-chain and on-chain keeper bots to handle rebalancing tasks. Off-chain keeper bots are responsible for complex calculations and rebalancing, while on-chain bots handle simpler tasks such as harvesting rewards. The rebalancing process also involves monitoring and managing portfolio drift, ensuring that the asset allocation remains in line with the strategy's objectives.
- 1.Diversification and Asset Concentration
Diversification is a key risk management principle that Rumi Finance employs to reduce the overall risk exposure of its strategies. By offering multiple investment strategies with varying risk profiles, the platform can spread risk across different assets and protocols. This lessens the impact of any single adverse event on the platform. The protocol actively monitors asset concentration within strategies and portfolios, rebalancing when necessary to maintain an optimal diversification level.
- 1.Counterparty Risk Assessment
Rumi Finance's strategies often interact with multiple DeFi protocols and assets. It is crucial to assess and manage the counterparty risk associated with these interactions. The platform's proprietary risk framework evaluates protocols, pools, and assets to determine maximum exposure limits. This assessment considers factors such as the protocol's security, liquidity, smart contract audits, historical performance, and governance structure. Counterparty risk is continuously monitored and managed to ensure that the platform's exposure remains within acceptable limits.
- 1.Liquidation Risk Management
Liquidation risk is a significant concern for leveraged strategies, as the forced sale of collateral can result in substantial losses. Rumi Finance actively manages liquidation risk by monitoring the health of borrowed positions and taking necessary actions to prevent forced liquidations. This includes adjusting collateral ratios, unwinding leveraged positions, and utilizing reserve funds or deleveraging mechanisms when needed to maintain the stability of the platform.
- 1.Risk Engine: Components and Functionality
The risk engine is a crucial component of Rumi Protocol's risk management framework. It consists of multiple elements working together to monitor, assess, and manage risks at various levels. Here's a detailed breakdown of the risk engine and its components
- 1.Data Collection: ETL Pipelines
Rumi Finance's risk engine relies on accurate and timely data to assess and manage risks effectively. Rumi collects data from on-chain and off-chain sources, such as blockchain transactions, protocol events, and market data. The data is then cleaned, normalized, and aggregated using Extract, Transform, Load (ETL) pipelines before being stored in an ElasticSearch cluster.
- 1.Risk Metrics Calculation
Using the data stored in the ElasticSearch cluster, the risk engine calculates various risk metrics for each investment strategy, pool, and asset. These metrics include Value-at-Risk (VaR), Conditional Value-at-Risk (CVaR), Sharpe ratio, volatility, and maximum drawdowns. These metrics help Rumi assess the risk-adjusted performance of its strategies and make informed decisions on rebalancing, diversification, and risk management.
- 1.Alerting system
An essential component of Rumi Finance's risk engine is its alerting framework, which continuously monitors the data stored in the ElasticSearch cluster. When predefined risk levels are breached, the alerting system triggers notifications and actions to respond appropriately. The alerting framework integrates with platforms like PagerDuty, enabling the Rumi team to receive real-time alerts and take prompt action to address potential issues.
- 1.Real-Time Monitoring Dashboards
To facilitate effective risk management, Rumi Finance utilizes Kibana to create visualizations of its positions, strategies, and pools. These monitoring dashboards enable the team to track the platform's performance and risk exposure in real-time, empowering them to make informed decisions and respond rapidly to changing market conditions.
- 1.Ongoing Strategy Reviews and Adjustments
Rumi Finance's risk management framework includes regular reviews and adjustments of its investment strategies. Weekly strategy reviews evaluate each strategy's performance, risk exposure, and alignment with the platform's objectives. These reviews may result in adjustments to the strategy's parameters or the implementation of new risk mitigation measures.
Additionally, Rumi Finance's risk committee conducts monthly reviews to assess the platform's overall risk exposure and make recommendations for further improvements to its risk management practices.
- 1.Risk Management Practices and Operations
- 1.Proprietary Risk Framework Scoring
Rumi Finance employs a proprietary risk framework scoring system to evaluate protocols, pools, and assets in order to determine maximum exposure levels. This framework helps the platform to maintain a balanced risk profile across all strategies and investments.
- 1.Investment Committee and Governance
An investment committee oversees the approval of strategies and portfolios, ensuring that they align with the platform's overall objectives and risk tolerance. The governance system allows for community input and decision-making, promoting transparency and accountability.
- 1.Risk Management Operations Engine
The risk management operations engine includes over 100 alerts and procedural action protocols, covering financial risks (liquidity, debt ratio health, asset concentration, rebalances, stable coin depeg) and system risks (keeper, bots, missing data, data source failures). This engine continuously monitors the platform and triggers necessary actions to mitigate risks.
- 1.Automated Kill Switches
Rumi Finance has implemented automated kill switches that can be activated in response to predefined risk levels or events. These switches help to protect the platform and users' funds by immediately halting affected strategies or operations when necessary.
- 1.Real-time Analytics Dashboard
A real-time analytics dashboard allows the team to monitor strategy performance and platform-wide risk exposure, enabling them to make informed decisions and take prompt action when needed.
- 1.Weekly Strategy Reviews
Rumi Finance conducts weekly strategy reviews to monitor the performance of its strategies and identify any potential risks. During these reviews, the team evaluates the effectiveness of the strategies, assesses their risk-adjusted returns, and makes necessary adjustments to maintain optimal performance and risk management.
- 1.Risk Reporting and Monitoring Framework
Rumi Finance has developed a comprehensive risk reporting and monitoring framework that includes key risk metrics such as C-Var, Sharpe, volatility, and drawdowns. This framework helps the team to track and manage risks effectively.
- 1.Drift and Portfolio Allocation Rebalances
Rumi Risk committee performs drift and portfolio allocation rebalances to ensure that the investment strategies remain aligned with the target risk profiles and asset allocations.
- 1.Risk Committee Monthly Reviews
Rumi Finance has a dedicated risk committee that meets monthly to review the platform's overall risk management practices and identify areas for improvement. The committee consists of experts in risk management, finance, and DeFi, who work together to ensure that Rumi Finance's risk management framework remains robust and effective.
During these meetings, the committee discusses the platform's risk exposure, reviews risk metrics, and evaluates the effectiveness of the risk management practices in place. They also assess the performance of the platform's strategies and make recommendations for adjustments or modifications as needed.
- 1.API Services for Reporting Financial and Risk Metrics
Rumi Finance offers API services to its institutional clients that enable users to access financial and risk metric data for both internal and external reporting purposes, promoting transparency and accountability.
- 1.MPC Wallet Management and Client Controls
Rumi Finance utilizes multi-party computation (MPC) wallet management on its Vault governance and treasury. For our institutional vaults, it allows clients to share control over their vaults' governance, ensuring security and collaboration in decision-making processes.
- 1.Smart Contract Security Audits and Bug Bounties
To maintain the highest level of security, Rumi Finance's smart contracts will constantly undergo thorough audits by external security firms, and the platform also runs bug bounty programs to incentivize the identification and resolution of potential vulnerabilities. First Audit has been done by Hacken, in March 2023
In addition to the regular risk management meetings and reviews, Rumi Finance has a proactive approach to identifying and mitigating risks as they arise. The team continually monitors the platform's operations and the broader DeFi ecosystem, allowing them to identify potential risks and take prompt action to address them.
This proactive approach to risk management ensures that Rumi Finance can respond quickly to emerging risks, protecting users' funds and maintaining the platform's stability.
- 1.Rumi's Future Developments and Enhancements in Risk Management Practices
Advanced Machine Learning Models
Rumi plans to integrate advanced machine learning models to further enhance its risk management capabilities. These models can help identify patterns and correlations in the data, enabling the platform to predict potential risks and make more informed decisions.
Real-time Stress Testing
Rumi is working on implementing real-time stress testing to simulate various market conditions and evaluate the platform's resilience under different scenarios. This will provide valuable insights into the platform's performance and stability during periods of market stress.
Enhanced Liquidity Risk Management
As the DeFi space continues to evolve, liquidity risks become increasingly relevant. Rumi aims to develop advanced liquidity risk management tools that will monitor and assess the liquidity of assets and protocols, helping to minimize the impact of liquidity crises on the platform's strategies.
Integration of Decentralized Insurance Solutions
To further enhance the security of its platform and protect users' funds, Rumi plans to integrate decentralized insurance solutions. This will allow users to purchase coverage for their investments, reducing the impact of potential losses resulting from smart contract vulnerabilities or other unforeseen events.
Continuous Improvement of Risk Metrics
Rumi is committed to continuously refining and expanding its risk metrics to better assess and manage the risks associated with the platform's investment strategies. This may include developing proprietary risk metrics specific to the DeFi space and incorporating new risk measures as they emerge in the industry.
Collaborative Risk Management Initiatives
Rumi plans to engage in collaborative risk management initiatives with other players in the DeFi space, sharing knowledge and resources to improve the overall security and resilience of the ecosystem. This may include participating in working groups, contributing to open-source risk management projects, and sharing best practices with other DeFi platforms.
Comprehensive Security Framework
To ensure the highest level of security, Rumi will continue to develop and maintain a comprehensive security framework that encompasses smart contract audits, bug bounties, and regular vulnerability assessments. This will help to identify and mitigate potential security risks and ensure the ongoing safety of users' funds.
By focusing on these future developments and enhancements, Rumi aims to solidify its position as a leader in DeFi risk management, providing users with a secure and reliable platform for their investments.
In summary, Rumi Finance's comprehensive risk management framework encompasses strategy design, financial operations, risk committees and reviews, and proactive risk management practices. By prioritizing risk management and continually refining its practices, Rumi Finance aims to provide a secure and reliable platform for users to access superior risk-adjusted returns in the DeFi space