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December 02, 2023

Managing risk in the DeFi industry during a bear market

Global stock markets are currently experiencing a bear market, which occurs when stock prices fall steadily for an extended period of time. As a result, trading and the cryptocurrency market both decline constantly.

Speaking on the subject of "Shining Light on DeFi Risk Management in a Bear Market with Gauntlet" from REDeFiNE TOMORROW 2023, Tarun Chitra, CEO and Co-Founder of Gauntlet, and Jayson Hobby, VP of Product of Compound (moderator), will be our guests in this article. He will talk about Gauntlet's development from its founding until the present when it has joined a risk management strategy in the cryptocurrency world, and he will offer advice for investors during a bear market.


What is Gauntlet? What does it do?

In 2018, Gauntlet was created to better understand the Proof of Stake (PoS) system and economic security. These two issues have grown in importance over the past year.

Gauntlet, meanwhile, emphasizes financial risk in the cryptocurrency industry. As an illustration of how the PoS system operated, Tarun said that many people were required to conduct transactions and that assets were needed as collateral. The borrower, lender, and inspector of collateral assets made up the lending protocol for debt repayment. He believed that there were numerous cryptocurrency systems that required system monitoring.

Gauntlet, he said, served as an assistant in managing potential risks associated with each protocol, including the lending protocol, staking protocol, and pool. Gauntlet also looked at quantitative risk information for both system users and users outside the system.

Tarun previously worked in a traditional financial system, which led him to realize how drastically different and varied finance in the crypto world was from traditional finance. As a result, Gauntlet developed the idea that it would aid in risk management for every protocol developed.


How can data be used to manage risk?

Gauntlet preferred using open data to operate an open system in the DeFi world to more conventional financial strategies. The world of DeFi did not require a medium to verify data, and it did not collect financial data from trustworthy sources to analyze, so we would never know if they were compatible or if they had been distorted or hidden.

Contrarily, the clear distinction was that in the crypto world, it was mandated by the standard data in every smart contract, forcing users to see the details of the tactic employed. It was then easy to collect information and collect usage data at the individual level, which could then be analyzed as an overview and designed for reliable risk management.


Gauntlet collaborated with Venus to design risk management on Binance Chain

Tarun mentioned the collaboration between Venus, a provider of asset lending services on the Binance Chain, and Gauntlet. Gauntlet investigated and gathered information about the shift in user experience and discovered that the market curve in this sector must ascend. He continued by saying it was impossible for businesses in this market to operate risk-free while still making a full profit. The interest rate was raised by the governance proposal Gauntlet created for Venus. On the other hand, it was discovered that Venus and its users could each make a net profit of up to $2–3 million.


Managing risk in a bear market.

In his first story, Tarun described a risk that frequently occurred during a bear market, such as the time the Mango Market was breached and lost about $100 million. As a result of Mango's failure to update collateral and interest rates parameters, the value of the Mango Market fell by 60–70%, creating a liquidity crisis and making asset values vulnerable to change management that could result in theft.

In a bear market, he continued, it was interesting to note that when assets lacked liquidity, investments in those assets might be lower. Investors need to exercise more caution when purchasing. In a bull market, Tarun reasoned, a similar attack or theft might also occur, but it would be difficult to track down since there would frequently be token launches or substantial subsidies due to the steadily rising value of the assets.

A protocol that helps users become aware of and comprehend these risks as well as respond promptly would prevent errors.


Gauntlet-style strategies for managing risks

The updated Gauntlet methodology, created to simulate price targets for calculating and managing risk, was the following issue. According to how they looked at user behavior, Tarun explained, the traditional financial market's liquidity was significantly different from that of the DeFi world.

It was well known that each chain had a different liquidity level, which affected how much an asset was worth. When determining the asset price to comply with each chain, risk management was required.


Capital efficiency management

According to Tarun, a decentralized system cannot achieve the same level of capital efficiency as a centralized one. However, the decentralized system might have greater liquidity than the centralized one.

In the DeFi universe, the capital could, on average, be efficient in many chains, he continued. There could never be just one chain that worked best. In summary, it was more complicated than the conventional financial system.

In order to handle risks thoroughly, Gauntlet would assist in managing every level of risk, including the design of working mechanisms and the development of market asset management on each chain.

Watch on YouTube at Shining Light on DeFi Risk Management in a Bear Market with Gauntlet


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