Warden Finance Docs
AppBlog
  • Moonwell Risk Methodology
    • Risk Vectors
      • Volatility Risk
      • Liquidity Risk
      • Oracle Risk
    • Governance Parameters
      • Interest Rate Model
      • Liquidation Incentive
      • Collateral Factor
      • Close Factor
      • Borrow Cap
    • Methodology
    • Tooling
  • Proposal Diff Reports
    • Sonne SIP-08 Diff Report
    • Moonwell MIP-B08 Proposal Diff Report
    • Moonwell MIP-B09 Proposal Diff Report
    • Moonwell MIP-M09 Proposal Diff Report
    • Moonwell MIP-B10 Proposal Diff Report
Powered by GitBook
On this page
  • Definition
  • Risks
  • Indicators

Was this helpful?

  1. Moonwell Risk Methodology
  2. Risk Vectors

Volatility Risk

Breakdown of volatility risk on Moonwell

PreviousRisk VectorsNextLiquidity Risk

Last updated 2 years ago

Was this helpful?

Definition

Volatility can be described as a measure of the amplitude of price changes for an asset over time.

Risks

Overcollateralized lending protocols like Moonwell are subject to volatility risks. As collateral and debt asset prices change, the collateralization of accounts changes.

In order to maintain solvency, the protocol must ensure that debts are always overcollateralized by assets of a higher value. If debts were not overcollateralized, borrowers would be economically incentivized to default on their debt. Defaulting would lead to the creation of bad debts in the system.

In order to mitigate asset volatility risk, the protocol enforces liquidations to ensure that debts are always overcollateralized.

Indicators

For our methodology we’ll use the following data points to assess an asset’s volatility profile:

  • Historical volatility - Past volatility can be a good indicator of future volatility

  • Historical drawdowns - Past worst asset decrease over a given period of time

  • Asset concentration - Wallets who hold a sizable portion of the total supply of the asset also have a sizable capacity to influence its price.

  • Asset liquidity - Deeper liquidity can decrease an asset's volatility.

  • Peg and collateralization - If an asset is pegged (ex: USDC) it will change its volatility profile.

Asset price feeds and volatility metrics, as provided on the
Warden Finance dashboard for WETH.wh