Nuant is pleased to announce the publication of the first in-depth quantitative risk analysis of DeFi protocols using the Nuant Quantitative System. Until now, institutional portfolio managers and investors have struggled with an absence of professional-quality tools and systems for quantitative analysis of DeFi, including the unique risks of this emerging sector.
This first risk analysis rigorously assesses the liquidation and liquidity risks of Compound v2, showcases the capabilities of the NQS, and demonstrates a step change in how institutional fund managers can assess DeFi risk.
You can download a copy of the Compound v2 Risk Assessment Report or keep reading for further context.
Nuant introduced the Nuant Quantitative System (NQS) in May 2023 as a brand-new, state-of-the-art solution designed to tackle the unique challenges of DeFi quantitative risk assessment and strategies simulation. The NQS provides a robust suite of tools for quantitative analytics, risk management, and research, enabling portfolio managers, quant strategists, data scientists and developers to confidently navigate the complex DeFi ecosystem.
> Run simulations with unlimited tokens for thorough market analysis.
> Simulate borrow, collateral deposit, swaps and dex liquidity provision scenarios to study associated risks and opportunities
> Mimic real-world behaviors like liquidity addition and position exit for accurate insights.
> Evaluate performance and risk of individual strategies.
> Capture long-term user interactions for a broader perspective.
The Data Stream is a powerful blockchain data infrastructure that combines data fetching, aggregation, efficient storage, and reliable delivery from leading DeFi protocols like Uniswap, Aave, and Compound, providing a comprehensive and up-to-date view of the DeFi landscape.
The Quantitative Framework is a state-of-the-art framework that empowers users to model, evaluate, and optimize DeFi protocols and strategies. Leveraging the Data Stream’s solid foundation, the QF features cross-protocol simulation and advanced simulations, enabling users to assess the risks of various protocols, analyze performance, and compare DeFi strategies in a unified environment.
The Integrated Environment is a web-based IDE that enables developers to rapidly build, test, and deploy data-intensive applications and analytics leveraging blockchain data. Based on the popular Visual Studio Code platform, IE supports popular programming languages like Python, TypeScript, and Solidity and offers seamless integration with the NQS’s Data Stream and Quantitative Layer.
Lending has become one of the leading use cases for DeFi, with Protocols for Loanable Funds (PLFs) currently holding around 30% of the total value locked (July 2023.) Compound was one of the early pioneers of decentralized lending markets, having initially launched in 2018. The project gained significant traction among users following the launch of Compound v2 in 2019, which introduced interest-bearing cTokens that can be used as collateral in other DeFi protocols. The following year, the project became one of the first to decentralize its governance with the launch of the COMP governance token.
Compound has also attracted significant engagement among DeFi users, with over $2 billion of digital asset value currently locked, as well as support from influential VCs such as Andreessen Horowitz and Bain Capital Ventures. Given its prominence in the DeFi ecosystem, depth of liquidity, and level of activity, Compound v2 is an ideal platform for showcasing the capabilities of the Nuant Quantitative System.
The Compound v2 Risk Assessment Report was produced by Nuant’s team of seasoned quants, data scientists, and software engineers using state-of-the-art techniques to stress test the stability of Compound v2 and evaluate the risks faced by investors who interact with the protocol.
There are several risks associated with interacting with DeFi protocols; however, with PLFs, the amount of bad debt is a predominant indicator of protocol health. The most immediate risk facing investors, which the report addresses, is liquidation. As the value of debt and collateral changes, investors must maintain a minimum collateral level against each position in order to avoid liquidation.
Another risk is protocol liquidity risk. Since the assets posted as collateral can be borrowed by other users, an investor may be unable to withdraw funds if the protocol liquidity (the total amount of token supplied that has not been borrowed by debtors) is less than the deposit.
To assess the combined effects of these risks, the Nuant DeFi Simulation Engine replicates protocol dynamics to generate cross-protocol, multi-agent simulations, which allows for the testing of multiple protocols under different market conditions and agent behaviors.
Starting from the analysis of whitepapers and smart contracts, the functioning of each protocol is coded in the Nuant Quantitative System (NQS) library, which is implemented using Python and Rust. Historical data, including smart contract events and parameters, are then plugged into the simulation using the Nuant proprietary data layer. This allows backtesting of investment strategies using the realized spot paths and protocol dynamics, as well as calibrating the distributions necessary for realistic forward-looking simulations.
The vast degree of freedom on the input parameters gives the user the possibility of studying a wide range of scenarios and corner cases. For instance, one can tailor the number of tokens simulated, as well as their dynamics and correlations, and the behavior of simulated agents – choosing, for example, how they provide or remove liquidity in any of the simulated protocols, or individual trading strategies, with the ability to analyze their yield and risk profile.
The results of the analysis are available in the full version of the report, which is now available to download.
Compound has been selected as an initial subject to showcase the extensive capabilities of the NQS. However, the same type of rigorous risk analysis can be applied to a range of other protocols using a vast array of customized testing conditions. If you are interested in leveraging the power of Nuant’s toolset, including the NQS and our cutting-edge Portfolio Management System, book an appointment today for a discussion and demo.
