Volatility Risk

Volatility risk (Rv) within the Alris protocol measures the fluctuations in asset prices and pool performance. It is calculated separately for lending pools and liquidity pools, each with tailored metrics to reflect their unique characteristics.

---

1. Lending Pool Volatility (Rv,l)

In lending pools, volatility risk is assessed using a weighted formula that evaluates two critical factors:

a. Stability of Annual Percentage Yield (APY)

• Definition: The standard deviation of hourly APY changes over 24 hours.

• Formula:

  σ_APY = √(1/24 ∑ (APY_i - APY_avg)^2)  

  • APY_i: APY at hour i.

  • APY_avg: Average APY over 24 hours.

b. Utilization Rate Fluctuations

• Definition: The standard deviation of hourly utilization rate changes, reflecting pool usage stability.

• Formula:

  σ_U = √(1/24 ∑ (U_i - U_avg)^2)  

  • U_i: Utilization rate at hour i.

  • U_avg: Average utilization rate over 24 hours.

Combined Lending Pool Risk

The total volatility risk for lending pools is calculated as:

Rv,l = w_a * σ_APY + w_u * σ_U  

• w_a and w_u are weight coefficients (default: w_a = 0.7, w_u = 0.3).

• Emphasis is placed on APY stability (w_a) over utilization fluctuations (w_u).

---

2. Liquidity Pool Volatility (Rv,p)

For liquidity pools, volatility risk focuses on metrics that capture pool activity and yield consistency:

a. Turnover Ratio (Tr)

• Definition: Measures trading activity relative to the pool’s depth.

• Formula:

  Tr = min(24h Volume / TVL, 1)  

  • 24h Volume: Trading volume in 24 hours.

  • TVL: Total Value Locked in the pool.

b. Normalized Yield Factor (Yn)

• Definition: Compares the current yield to a baseline yield.

Combined Liquidity Pool Risk

The total volatility risk for liquidity pools is calculated as:

Rv,p = w_t * Tr + w_y * Yn  

• w_t: Weight for turnover ratio.

• w_y: Weight for normalized yield factor.

---

Conclusion

By applying these formulas, the Alral engine dynamically evaluates volatility risk across lending and liquidity pools. This nuanced approach ensures that the Alris protocol optimizes asset management, enhances yield generation, and minimizes exposure to high-risk fluctuations in the decentralized finance ecosystem.