Harbor Protocol and $CMST Minting: Risk Assessment
High volatility is known to be associated with crypto assets, making them ineffective for payments as they could drastically change in value after a transaction. In businesses driven by payment structures on contractual agreements, volatility in the value of payment currency can be a hurdle to profitability for customers and businesses. It is this problem that triggered the design and introduction of stablecoins. To tackle this issue in the Cosmos ecosystem, the composite $CMST stablecoin’s mechanism was birthed on the comdex chain and it is designed to be the most reliable model for stablecoins, which is censorship-resistant, permissionless, and decentralized.
Harbor Protocol and the Composite Stablecoin
Harbor protocol is the dApp on the Comdex chain (powered by the Cosmos SDK and CosmWasm smart contracts) that enables safelisted assets to be locked in Vaults and mint $CMST. The protocol also facilitates users to earn interest by depositing $CMST in its Locker module.
The protocol also enables market makers and users to capitalize on arbitrage opportunities with its StableMint feature ensuring $CMST maintains its peg in secondary markets and finally the Harbor Protocol is now live on their Mainnet. You can check out the mainnet here, and a guide on how to interact on the Harbor protocol here.
Risk Assessment in Cryptocurrencies, Harbor Protocol and Composite $CMST Stablecoin.
DeFi is a fast-emerging sector, providing financial services using both unbacked crypto-assets and stablecoins. The emergence of DeFi has led to the growth of stablecoin, despite concerns about regulatory compliance, quality and sufficiency of reserve assets, and standards of risk management and governance. At present, stablecoins are used mainly as a bridge between traditional fiat currencies and crypto-assets, which has implications for the stability and functioning of crypto-asset markets. Where a major stablecoin fails, it is possible that liquidity within the broader crypto-asset ecosystem (including in DeFi) could become constrained, disrupting trading and potentially causing stress in those markets. This could also spill over to short-term funding markets if stablecoin reserve holdings were liquidated in a disorderly fashion. With this in mind, the Harbor protocol as an interchain stablecoin issuance protocol on the Comdex chain will enable collateralization of whitelisted assets to mint $CMST and $CMST holders will be able to earn fixed interest rates by depositing $CMST into the Locker module on the dApp.
$CMST is soft pegged to the US Dollar through a pegging mechanism inspired by MakerDao’s mechanism for the $DAI stablecoin. All $CMST on Harbor protocol exists as debt backed by overcollateralized assets. The protocol also has a defined minimum collateralisation ratio for each collateral type, built to take care of the problem of insolvency of the debt as it is with some DeFi protocols.
Minting $CMST on the Harbor Protocol : Risk Analysis
Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets or cryptocurrency markets.
To tackle this risk the Harbor Protocol ensures the safety of minting Composite stablecoin $CMST from different collateral assets by defining specific risk parameters to determine the riskiness of every individual collateral asset. Harbor’s risk assessment module has been built by taking inspiration from Mars Protocol. The platform assesses all the assets based on the following risk parameters:
1. Market Risk (Quantitative):
Measures the liquidity and volatility of the asset. This includes:
- Maximum intraday drawdown: Maximum price change (from high to low) in a trading day over the last 365 days.
- Volatility: Standard deviation of the logarithmic daily returns over the previous 90 days.
- 24-Hour Volume: Average 24-hour volume over the previous 90 days.
- Worst 7-day Volume: Minimum 7-day average 24-hour volume over the previous 90 days.
2. Project Risk (Qualitative):
This includes thoroughness and quality of audits performed on the project since the project launch, its reputation, and the integrity of the team behind the project. The various means of carrying out project risk are:
- Audits quality: Thoroughness and quality of audits performed on the project.
- Quality of smart contracts: Measures the overall riskiness of the smart contracts. Evaluates the use of best practices, the thoroughness of the tests, and the documentation, among other factors.
- Team: Evaluates the reputation and integrity of the team behind the project and the time since the project launched.
3. Debt Ceiling of Vaults:
The Debt Ceiling for every Individual asset vault is arrived at by analysing the 1-Day Volume, 7-day Volume, and Total Liquidity across different exchanges. This is done to ensure that the protocol does not take massive exposure on any single collateral in case of a black swan event.
4. Liquidation Ratio:
Another important feature of the Harbor Protocol is the Liquidation ratio. The liquidation ratio is the same as the minimum collateral ratio in the Harbor protocol. If the vault owner fails to maintain this ratio, his collateral will get auctioned off and a liquidation penalty will be applied. This will help the Harbor protocol have very less bad debt and keep the system in check.
5. Minimum Floor Value:
All vaults in the protocol will have a minimum value of CMST to be minted (e.g., $100) to avoid network congestion by any attacker by sending infinite transactions of minimal amounts.
Having gone through the various risk parameters, we can agree that the Harbor protocol is critically designed to ensure the safety of all its participants.
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