-
Notifications
You must be signed in to change notification settings - Fork 16
Commit
This commit does not belong to any branch on this repository, and may belong to a fork outside of the repository.
- Loading branch information
Showing
1 changed file
with
75 additions
and
0 deletions.
There are no files selected for viewing
This file contains bidirectional Unicode text that may be interpreted or compiled differently than what appears below. To review, open the file in an editor that reveals hidden Unicode characters.
Learn more about bidirectional Unicode characters
Original file line number | Diff line number | Diff line change |
---|---|---|
@@ -0,0 +1,75 @@ | ||
= The risk manager | ||
|
||
The risk manager holds a privileged role over the coverage pool. It maintains | ||
the ability to claim coverage from the pool, liquidating enough collateral from | ||
the pool to cover an outstanding obligation. | ||
|
||
Because of the nature of the role, the risk manager is a critical component of | ||
the coverage pool. Depending on the implementation, a risk manager can determine | ||
whether to put assets at capped or uncapped risk; how quickly auctions should | ||
put collateral up on offer; whether to end an auction early; and whether to | ||
remunerate existing underwriters in the case of "extra" assets on hand from an | ||
auction. | ||
|
||
== An example pool | ||
|
||
The tBTC v1 coverage pool has one purpose — to backstop the TBTC peg and | ||
simplify the lives of signers by guaranteeing to take any outstanding TBTC | ||
liquidation, trading TBTC for ETH. | ||
|
||
Because we have no guaranteed bounds on the ETHBTC price, the risk to the pool | ||
is technically uncapped; if the price of BTC suddenly 10x's relative to ETH, the | ||
pool is still on the hook for a fixed amount of BTC. On the other hand, once the | ||
pool takes a TBTC https://docs.keep.network/tbtc/#liquidation[liquidation | ||
auction], the resulting ETH proceeds should be distributed back to the pool. | ||
|
||
== Auctions | ||
|
||
When the risk manager claims coverage, it specifies an amount denominated in | ||
the asset the pool covers. An auction is opened across across all assets in the | ||
pool, increasing the portion of the pool on offer over time. Eventually, the | ||
entire collateral pool is on offer. | ||
|
||
For an auction to be filled, a participant pays the asking price, and in return | ||
receives a portion of each asset in the pool. | ||
|
||
Consider a collateral pool containing 10 WBTC and 100 WETH, and claim of 1 TBTC. | ||
|
||
.A collateral pool under auction | ||
[frame="topbot",options="header"] | ||
|============================================ | ||
|Time | Offer | WBTC on offer | WETH on offer | ||
|1 |1% |0.1 |1 | ||
|2 |2% |0.2 |2 | ||
|3 |3% |0.3 |3 | ||
|4 |4% |0.4 |4 | ||
|5 |5% |0.5 |5 | ||
|6 |6% |0.6 |6 | ||
|7 |7% |0.7 |7 | ||
|8 |8% |0.8 |8 | ||
|9 |8% |0.9 |9 | ||
|10 |10% |1 |10 | ||
|============================================ | ||
|
||
For simplicity, assume WBTC and TBTC trade at parity. Regardless of the ETH/WBTC | ||
exchange rate, there is a point between `t=1` and `t=10` where it makes sense to | ||
buy all assets on offer. | ||
|
||
An efficient on-chain implementation can allow partial and atomic fills, opening | ||
up arbitrage opportunities with lower total liquidity requirements. | ||
|
||
In addition to claiming coverage and opening an auction, the risk manager | ||
determines the parameters that govern the auction, including the velocity of the | ||
falling price based on market conditions, and whether to withdraw a claim and | ||
end an auction early. | ||
|
||
== Returning funds | ||
|
||
If there are funds to return to the pool after a coverage claim, a risk manager | ||
implementation can do one of two things | ||
|
||
1. Deposit the funds in the rewards pool, effectively distributing them across | ||
underwriters based on the relative reward rate, regardless of the asset. | ||
2. Deposit the funds directly in the collateral pool, requiring funds to be | ||
traded to match the existing collateral distribution, or intentionally | ||
distributing funds in a way that favors a particular underwritten asset. |