7. Protocol Risk

For peer-to-pool loans

The DeFi ecosystem is built by DeFi projects. The risk assessment considers market and smart contract risks for the NFTs selected for ProTradeX protocol in order to analyse the fundamental risks of the NFT assets in the ProTradeX Protocol and describes the processes in place to mitigate them

NFT Risk parameters

With ProTradeX, NFT holders will now be able to actively participate in the DeFi ecosystem. However, it also exposes the protocol to financial contagion. NFT collateral used in the protocol affects the protocol at its core, in particular NFT projects accepted as collateral which safeguard the solvency of the protocol. To ensure a collection holds a reasonable amount of risk, we currently investigate two different parameters.

• Trade Volume (Number of sales)

• Asset value (Average asset sales value)

Additional safeguard mechanisms

Dynamic caps according to each collection tier and volume

In order to limit the overall risk exposure of the protocol and the potential loss in the event of adverse events (rugs,...) we have defined dynamic caps on different collections tiers therefore ensuring that only a limited amount of NFTs from a collection can be accepted as collateral at the same time. To do so we have divided the whitelisted collections into 3 tiers and we then dynamically adjust caps for each collection according to their tier and to their last weekly volume.

Risk management dashboard from Cenit.Finance​

In parallel we are currently working with Cenit.finance (our risk management consultancy agency) on different models using both historical collections data and users data (agent-based simulation engine) so we can dynamically measure Value at Risk (VaR) & Liquidations at Risk (LaR) for different market conditions and therefore dynamicaly adjust parameters of the protocol : LTV, Margin of safety, max amount of collaterals from same collection active at the same time, ...

Protecting lenders as top priority

• Our liquidation process is flash raffles for holders. We don't host an auction and don't benefit from better NFT appraisal, but we liquidate NFT in minutes which is very important to protect the liquidity of the protocol.

• Our liquidation threshold for Perpetual loans is 30%, which provides a significant upside for a liquidator and is therefore a solid reason to participate in the first place.

• Our Perpetual loans lending pools are isolated for each collection, which limits the lender's risks to the liquidity of that collection only.

Liquidity Risk

For peer-to-pool loans

Overview

ProTradeX is an NFT liquidity and lending protocol that enables borrowing USDT.

The liquidity of the protocol is the availability of the capital to face business operations: borrowing amounts and redeeming assets. It is a key metric, as lack of liquidity will block business operations.

At any point in time, the liquidity of the protocol can be assessed through the utilization ratio: the share of reserve that is currently borrowed.

Capital provided in lending pools can only be withdrawn if there is enough unused liquidity in the pool, therefore loans might need to be repaid and/or new liquidity might need to be provided to the pool in order for depositors to be able to withdraw their deposits.

Interest Rate Model

ProTradex’s interest rate model is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates come from the Utilization Rate U.U is an indicator of the availability of capital in the pool. The interest rate model is used to manage liquidity risk through user incentivizes to support liquidity:

• When capital is available: low interest rates to encourage loans.

• When capital is scarce: high interest rates to encourage repayments for the loans and additional deposits.

A distinct model for each type of loans

• ​Interest rate model for Perpetual loans​

• ​Interest rate model for Flip loans​

Reserve factor and ecosystem reserves

The 30% reserve factor for Perpetual loans and Isolated lending pools is a safety mechanism that is progressively fueling the ecosystem reserves. These reserves are being accumulated and stored in case of bad debt or any black swan event happening so the protocol can repay lenders in such cases.