A multi-asset, agent-based approach applied to DeFi lending protocol modelling

TL;DR

This paper uses a multi-asset agent-based model to evaluate the systemic risk of DeFi lending protocols, demonstrating low default risk even under extreme market volatility scenarios.

Contribution

It introduces a novel multi-asset agent-based simulation approach to assess DeFi protocol risk, incorporating diverse historical data and stress testing extreme volatility.

Findings

Systemic risk remains small under stress scenarios.

Collateral sufficiency ensures low default risk.

Protocol tolerates over tenfold increase in asset volatility.

Abstract

We assess the market risk of the DeFi lending protocols using a multi-asset agent-based model to simulate ensembles of users subject to price-driven liquidation risk. Our multi-asset methodology shows that the protocol's systemic risk is small under stress and that enough collateral is always present to underwrite active loans. Our simulations use a wide variety of historical data to model market volatility and run the agent-based simulation to show that even if all the assets like ETH, BTC and MATIC increase their hourly volatility by more than ten times, the protocol carries less than 0.1\% default risk given suggested protocol parameter values for liquidation loan-to-value ratio and liquidation incentives.