DeFi project Aave introduces asset selection risk framework

AAVE is a recent industry-emerging lending agreement that has just introduced a risk framework for assessing new assets on the platform.

In light of the rapid growth of the agreement over the past few months, Aave is rapidly establishing its market leadership in top digital currency lending.The agreement supports nearly 20 assets, and the diversity of the agreement provides people with the ability to deposit top digital assets such as LINK and SNX (thus earning additional borrowing power) according to their preferences.

For those unfamiliar with Aave, the agreement will also allow people to make Flash Loans at a stable annual interest rate and use. The timing of the introduction of this risk framework is critical, as the team has recommended that the native token LEND be used to upgrade the governance framework in the coming weeks.

Here are some key points of the framework, and what lessons can be learned from other loan agreements:

Methodology

Like other risk frameworks, Aave's asset ratings follow a similar approach, which is to rate assets from A + (least risk assets) to D- (highest risk assets). By scoring each asset, others can easily see the risk status and changes of different assets. In recent weeks we have also seen similar services provided by projects such as DeFi Score and Inspection.

Aave's risk team focuses on the following risk factors:

• Smart Contract Risk. This risk is considered in terms of the number of audits, maturity, and transactions of the underlying contract of the asset.

• Counter-Party Risk. The degree of asset centralization is based on governance and custody.

• Market risk. Market value, price volatility and liquidity risk. Can an asset withstand market fluctuations? Or is it too volatile and often faces the risk of liquidation?

Next, let's take a look at how these factors have contributed to the assets on the current platform.

It should be noted here that although Dai is often touted as the asset with the least risk of centralization, in terms of maturity (Maturity) it is the most risky asset on Aave because Multi-Collateral Dai Launched less than a year. This is not to say that Dai is "risky", we just say that using a series of different indicators helps to better determine the potential risk (and the return level corresponding to taking the risk).

The new risk framework also provides qualification criteria (Qualification Criteria), which better demonstrates how different ratings are achieved.

The figure below is the Currency Risk Map, which clearly shows the different ratings that each supported asset of the platform has received so far. With the addition of new assets and the update of new indicators, this list will be updated regularly to better reflect the real-time rating of assets.

Overall, it is clear that ETH is the least risky asset on the Aave platform. This explains why it is most often used for lending and lending the digital currency with the lowest rate of return. This is because the supply of ETH is sufficient, and because the risk of lending ETH is far less than that of bUSD (D +) or WBTC (C +). 

Going forward

Although the risk framework is nothing new, it is in fact one of DeFi ’s biggest and probably one of the most important trends in recent months. As more and more projects launch risk assessment frameworks, these ratings will be more easily digested and understood by end users (this is also a matter of course), which will better guide their lending activities and avoid dealing with investors. Design more high-risk asset activities.

As DeFi continues to mature, we firmly believe that an appropriate risk framework is critical to the development of the deauthorized digital currency market. To be sure, Aave will introduce more assets in its existing diversified asset pool in the near future.