The Importance of Risk Assessment and How 0VIX is Raising the Bar for Defi with Advanced Risk Measurement
Recent events in the crypto space have very publicly highlighted the need for improved risk management throughout the industry, from degens to boardrooms. Many argue that the multi-billion dollar collapses of trust-based centralised exchanges like Celsius and FTX perfectly capture why DeFi is essential. When CEXs collapse, most users find out way too late. DeFi provides total transparency on liquidity, governance and more. New protocols are even trying to roll out features that prevent users from getting rekt.
0VIX Protocol is Polygon’s core money market, and is leading a new standard of risk measurement in DeFi. Founded by a team of DeFi, fintech and TradFi experts, 0VIX is the first lending protocol on Polygon to feature
Around the time of that event, the 0VIX pre-mine was launched. Since the launch, 0VIX has become one of the fastest growing projects on Polygon, gaining
0VIX was a platinum sponsor of the Blockchain Oracle Summit 2022. In this article, we’ll take a closer look at 0VIX’s pre-mine, as well as their unique risk management features.
Innovating User Risk Management
0VIX recently introduced a new feature called the 24h Liquidation Probability Dashboard. This dashboard helps users track their investment positions by making liquidation probability data publicly available on the platform itself. The 24h Liquidation Probability Dashboard shows users the following information:
- Probability of the user getting liquidated in the next 24 hours
- Which percentile of user risk their probability score falls into (to compare probability scores against other users in the system)
With this data, users are able to conveniently track their portfolio performance and react accordingly, making it much easier to manage their own risk. More in-depth information about 0VIX’s Liquidation Probability Dashboard can be found here.
Heavy Focus on Research & Statistics
In our previous article about 0VIX, we covered the smart tokenomics and in-house risk assessment framework discussed in Daniele Pinna’s presentation at the Blockchain Oracle Summit. As 0VIX’s Head of Research and Innovation, Daniele has also been working on stress testing the protocol and dynamic interest rates.
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Dynamic Interest Rates: Most DeFi lending protocols today suffer from major inefficiencies due to the high volatility of borrowing rates. This is usually caused by the use of “jump rate” interest rate models. While the use of jump rates is considered an industry standard in DeFi, it does not adapt well to unpredictable market conditions. In order to overcome this issue, 0VIX makes use of dynamic interest rates instead. Dynamic interest rates change in tandem with the market, resulting in more stable borrowing rates and a more sustainable protocol as a whole. This is especially useful during highly volatile markets caused by Black Swan events, as it incentivises users to maintain liquidity on 0VIX in any market condition. Through interest rate innovation, 0VIX is able to stay true to the origin of its name; The “Zero Volatility Index”.
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Stress Testing: In order to ensure that the protocol is able to handle extreme market conditions, the 0VIX team have meticulously stress-tested the system using price data from the past three years. The team simulated the price action of various assets from this period, including the “Covid Crash'' in March 2020, using their in-house risk assessment framework. According to the team, stress testing the protocol with real-world price trajectories has helped to prove that 0VIX is capable of remaining stable during the most volatile market conditions. A fundamental reason for 0VIX’s stability during extreme market conditions is the incentive mechanism put in place to encourage constant monitoring and liquidation calls. Basically, a proportion of liquidation incentive is allocated to each asset being used as collateral in order to prioritise the liquidation of certain assets over others.
0VIX Pre-Mining Rewards Program
All users supplying to or borrowing from markets listed on the
Instead of simply averaging the Annual Percentage Returns (APRs), 0VIX offers different APRs for borrowing and lending. Markets with lower TVLs will be allocated higher APRs compared to others. This acts as an incentive for users to interact with markets with lower TVLs which is ideal for the overall “health” of the protocol. More information about exactly how the APR is calculated can be found in
To ensure a fair allocation of rewards, users receive a score for each market they have interacted with. The scores are then added together to provide a “totalUserScore”. In order to calculate an individual user’s share of rewards, the totalUserScore is divided by the sum of all scores from all 0VIX user accounts. Reward allocation is updated every week. Each week is considered as one “epoch”. In order to prevent users from manipulating or “frontrunning” the rewards program by interacting with markets just before the end of an epoch, every epoch starts and ends at random times – users who try to manipulate the program risk losing their potential rewards altogether.
Looking forward, The 0VIX team is currently working on V2 of their risk assessment simulations. In V2, these will be upgraded to feature AI-powered simulations. The team is also implementing the use of “toxicity numbers” on the 0VIX platform. Toxicity numbers are an industry-wide metric used to measure exotic assets. It helps to calculate how much of an asset is actively used as collateral on lending markets, and compare that to the amount of liquidity available to safely liquidate the collateral. More information about 0VIX’s upcoming plans can be found in
For a peek under the hood at 0VIX, check out
Find out more about 0VIX: