How are Risks Assessed by the Harbor Protocol?

5 min readNov 5, 2022

You may know the Harbor Protocol to be a decentralized protocol designed for minting Composite stablecoins ($CMST), which can be used across chains and in the Cosmos ecosystem.

With the Harbor Protocol developed by the Comdex network, you can turn whitelisted assets into collaterals as a means of minting the $CMST stablecoin, which is pegged to the US Dollar as a debt backed up by these assets.

As a $CMST holder, you have access to rewards in form of interest rates, when you lock your holdings in the Locker module of the protocol.

Harbor Protocol has a minimum collateralization ratio for each type of collateral commodity. This is done to keep the debts pooled in the protocol financially stable to promote liquidity.

However, the minimum collateralization ratio serves as a risk factor, as borrowing above the limit can get your assets liquidated.

The Risk Factors

Under the role model influence of Mars Protocol, the Harbor Protocol makes sure it is safe to mint $CMST with various collateral commodities via the use of various assessment modules which are established to identify the dangers in each of these collateral commodities. These include:

Market (Quantitative) risks
Project (Qualitative) risks.

Market risks are quantitative, because they check the volatility and liquidity of the collaterals, while Project risks examine the quality and accuracy of internal audits carried out within Harbor projects.

1. Project risks: look at the what has happened since the project in question was launched, how popular it has become, and how much integrity the members of the project team have. They also inspect the generality of risks the smart contracts have, takes a glance through the project’s practices, sees how rigid and effective the project tests are, goes through the whitepaper, etc., to make sure there are no more glitches.

2. Market risks: track the highest possible price change (from high to low) in a trading day, versus the last 365 days. They measure the average price volume of 24 hours, spanning the last 90 days, and monitors the square root of the variance of daily returns generated in the blockchain ledgers over the last 90 days. Market risks also point out the worst in a weekly volume of trade, over the previous 90 days as well.

Values and Scoring

The Harbor Protocol makes use of what is known as a scoring methodology. This ranks the value of the collateral assets available, in an alphabetic order, from A (the highest) to D (the least).

Rank A places a collateral’s value at 1, while Rank D keeps the asset’s value at 0.1, the same way Rank B places its assets at 0.7, and Rank C settles collateral commodities at 0.4.

For Market Risk, any collateral which falls in the following ranges will be assigned A to D.

1. Intraday worst drawdown

Collaterals falling under 0% are ranked A, those falling between -10% to -30% are ranked B, and those between -30% to -50%. The worst rank, D, is for drawdowns falling below -50%.

2. Volatility

Assets that have volatility worth zero to 3% are ranked A, those from 3% to 7.5% are ranked B. assets with a volatility percentage of 7.5 to 10 are ranked C, while those having 10% and more volatility percentage are classified as Rank D.

3. Worst Week Volume

Collateral assets that have a 7-day trading volume of more than one million are ranked as A assets. Those having their volume raking between 5000,000 to one million are graded B assets.

Assets with a weekly volume of 100,000 to 500,000 are C assets, while those ranking below 100k are automatically classified as D assets.

4. 24-hour volume

Just the same way the week volume assets are graded, those raking one million and more in a day are ranked as A assets, and the list continues.

500k — 1million = Rank B.
100k — 500k = Rank C.
Zero — 100k = Rank D.

For Project Risks, according to release date, test accuracy, and team transparency, the Harbor Protocol ranks collateral assets as well, from A to D.

When the scores for each variable within each category has been settled, the project team calculates the final numeric risk score that would be the average score of each category’s risk score.

The Harbor Protocol assigned 70% to the Market Risk Score, giving 30% to its Project Risk Score counterpart, as 0.7 + 0.3. Meanwhile, collateralization can be determined by dividing the minimum collateralization by the weighted risk score.

Worked Examples

Calculating market risks involves summing up the intraday worst drawdown, volatility, 24-hour volume, and worst 7-day volume, dividing this sum by 4.

Let us say that a particular collateral asset ranks A in worst drawdown, B in volatility, C in full-day volume, and D in full-week volume, the market risk score for this asset would be 1+0.7+0.4+0.1, which equals 2.2, divided by 4, making the final MRS equal 0.55.

Calculating project risks are more complex.

Take for example, a collateral commodity is ranked B (0.7), the minimum collateralization is 150%, and the weighted score is 0.7525, the collateralization ratio would be 150% divided by 0.7525, which equals 199.3%.

Liquidation

A vital risk-eliminating force within the Harbor Protocol, the liquidation ratio serves as the minimum collateralization ratio of the decentralized application, auctioning off under-collateralized debt assets and vaults when their owners do not maintain the ratio.

When your debts begin to go deeper without any collateral to back them up, the ratio automatically disbands them after a given period of waiting, to prevent the protocol’s strength from weakening.

Floor Value

Some protocols have had experiences where attackers mint very tiny amounts of tokens, leading to impulsive transactions from which they could infiltrate.

Therefore, another risk-preventing mechanism within the Harbor Protocol, minimum floor value makes sure that all vaults in the protocol mint $CMST according to a community-decided minimum value, in such a way that you will not be able to mint lower than that value.

Governance

Another way the Harbor Protocol fights against threats is via its governance. Members of the protocol come together to propose and pass laws governing it.

Risk scores, for example, are passed through the governance as proposals, after being calculated by project teams.

New types of collaterals can likewise be introduced by any protocol member, as a proposal, to be passed through governance. This system breeds the strength of decentralization and ensures security stays updated.

About Comdex

A decentralized infrastructure layer of the Cosmos ecosystem, Comdex makes use of its network of financial solutions, giving these to their investors, along with major know-hows about classes of assets as well as other beneficial projects.

To gain more further information about the network, follow Comdex via the following:

Website: https://comdex.one/home

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