Liquidity Risk

The liquidity risk assessment in the Alris protocol focuses on evaluating how easily positions can be entered or exited, especially during market stress or volatility. This ensures that assets within the protocol remain liquid, stable, and accessible.

Liquidity Risk Components

The liquidity risk is assessed separately for Lending Pools and Automated Market Maker (AMM) Pools, using distinct formulas and metrics tailored to each type of pool.

---

1. Lending Pools Liquidity Risk (Rl,l)

Formula: Rl,l = wu * U + wc * Cd

Where:

• Utilization Rate (U): Measures the proportion of deposited funds that are currently borrowed. A higher utilization indicates more of the pool is in use.

• Deposit Concentration (Cd): Reflects the potential impact of large withdrawals from the pool. If a few users control a large portion of the pool, the risk increases.

Weights:

• wu: Weight assigned to the Utilization Rate (U).

• wc: Weight assigned to the Deposit Concentration (Cd).

These metrics help gauge the pool’s ability to handle liquidity demands without significant slippage or withdrawal delays.

---

2. AMM Pools Liquidity Risk (Rl,p)

Formula: Rl,p = wd * Dr + wc * Cr

Where:

• Depth Ratio (Dr): Measures how the pool's total value locked (TVL) compares to the market’s liquidity requirements. It is calculated as:

  Dr = 1 - min(Pool TVL / Target TVL, 1)

• Concentration Ratio (Cr): Reflects how concentrated liquidity is among the largest liquidity providers. It is calculated as:

  Cr = Largest LP Share / Total Pool TVL

Weights:

• wd: Weight assigned to the Depth Ratio (Dr).

• wc: Weight assigned to the Concentration Ratio (Cr).

These metrics help assess the risk associated with liquidity being tied to a small number of providers or insufficient depth to accommodate large transactions.

---

Role in Alris Protocol

• Risk Mitigation: By calculating the liquidity risk of both lending and AMM pools, the Alris protocol can prevent liquidity shortages or inefficiencies, especially during high market volatility.

• Dynamic Adjustments: The protocol adjusts asset allocations dynamically based on these risk metrics, ensuring funds are allocated to pools with adequate liquidity and minimal exposure to potential liquidity crises.

• Real-Time Monitoring: The Alris protocol continuously monitors liquidity risk, updating the risk metrics as market conditions change, allowing for real-time risk management and portfolio optimization.

---

Conclusion

Liquidity risk assessment in the Alris protocol ensures that funds remain accessible and stable, minimizing the impact of liquidity challenges. By evaluating Utilization Rate, Deposit Concentration, Depth Ratio, and Concentration Ratio, the protocol can dynamically manage and mitigate risks in Lending Pools and AMM Pools, ensuring secure and efficient fund management.