Financial Operations and Risk Management

3. Financial Operations and Risk Management

3.1 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.

3.2 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.

3.3 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.

3.4 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.

3.5 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.

3.6 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.