Risk Assessment Example
Below is a risk assessment framework using Yearn's strategy with CRV tokens on Notum, aimed at DeFi investors with moderate knowledge who are open to taking calculated risks for potential rewards
Last updated
Below is a risk assessment framework using Yearn's strategy with CRV tokens on Notum, aimed at DeFi investors with moderate knowledge who are open to taking calculated risks for potential rewards
Last updated
TVL: $344.5m
Market Cap: $477.32m
Risk Level: Medium to High
Foundation Date: Jul, 2020
Yearn Finance is a hub of various DeFi products such as vaults, a lending aggregator, zap in/out solution, and DeFi insurance. Yearn is managed by multiple independent developers and is governed by $YFI holders making sure that yield generation is truly decentralized. Yearn Finance is in top 5 yield aggregators by TVL.
The core product of Yearn is yVault, which provides automated yield generation to many different crypto assets and shares are represented by yvTokens or yTokens. This is yVaults V2 allowing to execute several strategies at the same time. It also accepts individual tokens or liquidity provider tokens as deposits.
The vaults take two types of fees:
a performance fee of 20% (which is split between the project’s treasury and the strategist);
a management fee of 2% (which goes to the treasury).
Because Yearn is a permissionless yield aggregator, anyone with the right skills can apply to become a strategist.
Protocol risks: all risks related to vulnerabilities of the protocols. These risks are fundamental as they cover all the investment options provided by this protocol, thus it should be considered when assessing the risk of any single investment provided by the protocol.
Assets risks: risk that stems from assets that are involved in the strategy. We calculate the risk of all assets that are used in the strategies that are displayed on the platform. If there are several assets involved in the strategy the average of these assets is used for calculating the overall investment risk.
Pool risks: risks that stem from the details of the pool. Such as Liquidity in the pool, Impermanent loss, and blockchain details, which are used to host the pool. All these details are used to assess the risk of the pool.
There are 3 risk levels and 6 different risk grades that you will find on the Notum Platform: A, B, C, D, E, and F.
A and B grades refer to good, low-risk investments;
C and D grades refer to average investments that might have several drawbacks or minor issues with some of the components;
E and F refer to risky investments, which might have some significant issues.
One of the Yearn’s core offering is yCRV which is a derivative of veCRV that can be staked to get st-yCRV. st-yCRV holders receive admin fees earned by Yearn’s veCRV position, which is used to get more yCRV.
yCRV is the base-token, and it goes without rewards, but it lets users easily enter into the other' activated' tokens that have.
Holders of the yCRV derivative token can become an LP for the CRV/yCRV pool, getting lp-yCRV tokens to gain fees. The liquidity pool rewards are distributed and compountedb in CRV, and then sent back to the pool to boost the LP position over time.
Similar to st-yCRV, for every 1 yCRV converted to the lp-yCRV derivative token attains 1 veCRV worth of voting power to vote in favor of the yCRV Curve gauge.
The more votes there are for the yCRV gauge, the larger the amount of CRV emissions that will be directed to the CRV/yCRV pool, resulting in higher yields for lp-yCRV token holders.
The strategy is quite straighforward:
Exchange CRV for st-yCRV on Yearn to gain staking rewards;
Convert st-yCRV into yCRV LP tokens in Yearn to use them to farm CRV emissions and trading fees;
Get your CRV back in Curve to get back the original token.
Let’s break down the following strategy presented on Notum using key dimensions we’ve mentioned above.
Curve Finance is one of the largest DeFi protocols in terms of TVL with a value of $1.698 b. This protocol is exposed to risks linked to decentralized exchanges (DEXs), such as impermanent loss.
Curve’s automated market maker (AMM) technology is specialized to provide trades between highly correlated assets like two stablecoins. This minimizes price impact while trading. It is currently the main protocol to trade stablecoins.
Yearn.finance is the top DeFi yield aggregator with a TVL of around $328.99 m. This protocol is open to risks connected to yield optimizers which applies custom strategies to automatically maintain user funds. Yearn reinvests any available rewards directed to the pool to help you maximize your yield.
| Protocol Risk | Score explanation | Actual Risk Score | Weight in percentage |
|---|---|---|---|
Protocol Audits | Overall protocol passed 3 Audits | 95 | 16.7% |
Protocol Audits in the Last 2 Years | 2 Audits passed in the last 2 years. | 95 | 16.7% |
Protocol’s Exploits | There was 1 exploit in 2023 that resulted in the loss of $11M. | 70 | 16.7% |
Protocol’s Exploits for Current Version | There was 1 exploit in 2023 that resulted in the loss of $11M | 70 | 16.7% |
Protocol’s Maturity | The protocol has been running for more than 2 years | 95 | 16.7% |
Protocol’s Liquidity (TVL) | Protocol overall liquidity exceeds $300M | 95 | 16.7% |
Overall | 86.6 | 100% |
CRV is a low-cap asset with a fixed supply. yCurve is issued 1:1 to CRV and it represents CRV locked within Yearn. The value of CRV is exposed to fluctuation, and as a matter of logic, yCRV mimics the pattern. Besides, you, as an investor, may experience technical or/and operational issues from both — Yearn and Curve protocols.
| Assets’ Risk | Score explanation | Actual Risk Score | Weight in percentage |
|---|---|---|---|
Market capitalization of assets | Asset’s capitalization is above $1M. | 70 | 25% |
Volatility of an asset | There has been significant price fluctuation in the last year exceeding 100% in the last year. | 50 | 25% |
Intrinsic value of the asset or collateralization | The asset is used as a utility in the Yearn and Curve ecosystems. | 70 | 25% |
Code quality of the asset | There are no detected vulnerabilities in the asset. | 95 | 25% |
Overall | 71.25 | 100% |
The following pool is suitable for investors who are looking for long-term CRV exposure. This pool performs well when there is enough liquidity to trade between yCRV and CRV. The main risks here are that yCRV might lose its peg to CRV given the limited liquidity available on Curve and an impermanent loss scenario. It’s also subject to price fluctuations, as it’s exposed to its native asset.
| Pool Risk | Score Explanation | Actual Risk Score | Weight in percentage |
|---|---|---|---|
Liquidity of the pool (TVL) | Exceeds $20M | 95 | 33% |
Impermanent loss | No Impermanent Loss | 95 | 33% |
Blockchain Maturity | Pool is based on the Ethereum blockchain which has operated for more than 4 years. | 95 | 16.7% |
Blockchain Reliability | The pool is based on the Ethereum blockchain which has had no halts or issues in the last year. | 95 | 16.7% |
Overall | 95 | 100% |
The overall Risk Score for this pool is calculated using the received scores, meaning that we calculate an average of Protocol Risk, Asset Risk, and Pool Risk. To put this in numbers, total risk equals to (86.6 + 71.25 + 95) / 3 = 84.2.
Based on Notum’s risk assessment framework, this constitutes to B Grade, Low Risk investment.
Yearn represents a trust worthy decentralized yield aggregator that empowers its users to earn passive income by depositing assets and receiving yield. In our particular case, this is achieved by gaining an enhanced yield when locking CRV tokens with Notum.
This CRV startegy has some risks. Although the strategy is rather simple, yet it demands some understanding of how DeFi operates. It involves a 90-day locking period, so rewards are paid out at the end of this period.
Notum considers CRV on Yearn as an investment for an investor with a medium understanding of DeFi and yielding, who is willing to take on some risk in exchange for an interesting reward on CRV.
